-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FLQw/CWFjaMQOLrwJjD/9roxCJqOu/aK7/AE3WSQ5iNJx9jFPwzyKSDroHovnfaa WJDPwFw8rdJR+8YcWSVy2w== /in/edgar/work/20000828/0000026987-00-000007/0000026987-00-000007.txt : 20000922 0000026987-00-000007.hdr.sgml : 20000922 ACCESSION NUMBER: 0000026987-00-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000828 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMTEK INTERNATIONAL INC CENTRAL INDEX KEY: 0000026987 STANDARD INDUSTRIAL CLASSIFICATION: [3672 ] IRS NUMBER: 330213512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0702 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08101 FILM NUMBER: 710552 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: THOUSAND OAKS STATE: CA ZIP: 91320 BUSINESS PHONE: 8053762595 MAIL ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: HOUSAND OAKS STATE: CA ZIP: 91320 FORMER COMPANY: FORMER CONFORMED NAME: DDL ELECTRONICS INC DATE OF NAME CHANGE: 19940119 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES DATE OF NAME CHANGE: 19880817 10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ___________ ___________ Commission File Number 1-8101 ___________ Exact Name of Registrant as Specified in Its Charter: SMTEK INTERNATIONAL, INC. ______________________________ DELAWARE 33-0213512 _____________________________ _____________ State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization No. Identification Address of Principal Executive Offices: 2151 Anchor Court Thousand Oaks, CA 91320 _________________________ Registrant's Telephone Number: (805) 376-2595 _________________________ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered _________________________ ___________________________________________ Common Stock, $.01 Par Value Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price as reported by Nasdaq on August 21, 2000 was $4,959,000. The registrant had 2,275,012 shares of Common Stock outstanding as of August 21, 2000. DOCUMENTS INCORPORATED BY REFERENCE Specified parts of the registrant's Annual Report to Stockholders for its fiscal year ended June 30, 2000 are incorporated by reference into Parts I and II hereof. Specified parts of the registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders, which Proxy Statement will be filed within 120 days of this report on Form 10-K, are incorporated by reference into Part III hereof. THIS ANNUAL REPORT ON FORM 10-K, INCLUDING EXHIBITS HERETO, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENT ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS IMPORTANT FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING THOSE DESCRIBED AS "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-3 (NO. 333-62621) FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND DECLARED EFFECTIVE ON SEPTEMBER 17, 1998 AND IN OTHER DOCUMENTS THE COMPANY HAS FILED AND FILES, FROM TIME TO TIME, WITH THE SECURITIES AND EXCHANGE COMMISSION. PART I Item 1. BUSINESS GENERAL SMTEK International, Inc. (the "Company") is an electronics manufacturing services ("EMS") provider to original equipment manufacturers ("OEMs") primarily in the computer, telecommunications, instrumentation, medical, financial services automation, industrial and aerospace industries. The Company provides integrated solutions to OEMs across the entire product life cycle, from design to manufacturing to end-of-life services, for the worldwide low-to-medium volume, high complexity segment of the EMS industry. The Company's operating units are located in Thousand Oaks, California; San Diego, California; Fort Lauderdale, Florida; and Craigavon, Northern Ireland. On November 12, 1999, the Company sold Irlandus Circuits, Ltd. ("Irlandus"), its printed circuit board ("PCB") fabrication operation in Northern Ireland, to a management buy-out team. Accordingly, the results of operations of Irlandus, which represented a separate segment of business, have been presented as a discontinued operation for all periods presented in the accompanying consolidated statements of operations and comprehensive income (loss). On January 29, 1999, the Company acquired Technetics, Inc. ("Technetics"), an EMS provider in San Diego, California, in order to enhance the Company's presence in Southern California. The acquisition of Technetics was accounted for under the purchase method of accounting. On June 30, 1998, the Company acquired Jolt Technology, Inc. ("Jolt"), an EMS provider in Fort Lauderdale, Florida. The acquisition of Jolt was accounted for under the pooling-of-interests method of accounting. The Company was incorporated in California in 1959 and was reincorporated in Delaware in 1986. The Company changed its name from Data- Design Laboratories, Inc. to DDL Electronics, Inc. in December 1993, and in October 1998 the name was changed to SMTEK International, Inc. The Company's executive office is located at 2151 Anchor Court, Thousand Oaks, California 91320, telephone (805) 376-2595. INDUSTRY OVERVIEW EMS Industry The EMS industry can be classified into two general segments: high- volume and low-to-medium volume. The Company focuses on the low-to-medium volume segment. Manufacturers in this segment are highly fragmented and competitive. Customer bases tend to be highly concentrated, with two or three customers typically accounting for a significant portion of an EMS provider's total revenue. Two principal assembly techniques are employed in the EMS industry: surface mount technology ("SMT"), which accounts for the majority of manufacturing; and through-hole technology. Management believes that the low-to-medium volume EMS market is continuing to move toward SMT as the preferred manufacturing technique, mainly because semiconductors have continued to decline in size, thereby lowering manufacturing tolerances. The Company's production processes are predominantly SMT. Description of EMS Products and Services Production of electronic assemblies for a customer is only performed when a firm order is received and accepted. Customer cancellations of orders are infrequent and are usually subject to cancellation charges. More often, a customer will delay shipment of orders based on its actual or anticipated needs. Electronic assemblies are produced based on one of two general methods, either "turnkey" (where the Company provides all materials, labor and equipment associated with producing the customers' product) or "consigned" (where the Company provides only labor and equipment for manufacturing electronic assemblies and the customer provides the materials). The Company's EMS operations provide both turnkey and consignment electronics manufacturing services using surface mount and through-hole interconnection technologies. The Company conducts its domestic business through its facilities in Thousand Oaks, San Diego and Fort Lauderdale, and its European business through its SMTEK Europe Limited subsidiary in Northern Ireland. The Company's EMS operations do not fabricate any of the components used in these processes. The materials procurement element of the Company's turnkey services consists of the planning, purchasing, expediting, warehousing and financing of the components and materials required to assemble a board-level or system- level assembly. Customers have increasingly required the Company and other EMS providers to purchase some or all components directly from component manufacturers or distributors and to finance the components and materials. In establishing a turnkey relationship with an EMS provider, a customer typically incurs costs in qualifying that EMS provider and, in some cases, its sources of component supply, to refine product design and to develop mutually compatible information and reporting systems. With this relationship established, the Company believes that customers experience significant difficulty in expeditiously and effectively reassigning a turnkey project to a new assembler or in taking on the project themselves. At the same time, the Company faces the obstacle of attracting new customers away from existing EMS providers, or from the customers' in-house assembly operations. RISK FACTORS Due to the risk factors noted below and elsewhere in this Form 10-K and other filings by the Company with the Securities and Exchange Commission, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Furthermore, the Company participates in a highly dynamic and competitive industry, which can result in volatility of the Company's common stock price. The Company's results of operations may be affected by several other risk factors as described below: Fluctuation in Operating Results The Company's operating results are affected by a number of factors, including the timing of orders from and shipments to major customers, availability of materials and components, the volume of orders relative to the Company's capacity, timing of expenditures in anticipation of future sales, the gain or loss of significant customers, variations in the mix between consignment and turnkey arrangements with customers, variations in the demand for products in the industries served by the Company, and general economic conditions. Operating results can also be significantly influenced by the development and introduction of new products or technologies by the Company's customers, or such customer's competitors, which may materially and adversely affect the demand for the Company's services. Variations in the size and delivery schedules of purchase orders received by the Company, changes in customers' delivery requirements, or the rescheduling or cancellation of orders and commitments may result in substantial fluctuations of revenues, backlog and profits from period to period. A significant portion of the Company's expenses is relatively fixed in nature and planned expenditures are based in part on anticipated orders. The inability to adjust expenditures quickly enough to compensate for a decline in net sales may magnify the adverse impact of such decline in the Company's results of operations. Also, the Company may not be able to respond quickly if there is a sudden increase of demand for its services as the Company may require additional capital expenditures and personnel to handle this additional capacity. Concentration of Customers The Company's customer base is highly concentrated. For fiscal years ended June 30, 2000, 1999 and 1998, the Company's three largest customers, as a percentage of total revenue, are as follows: Year Ended June 30, -------------------------- 2000 1999 1998 ------ ------ ------ First largest customer 15.5% 23.8% 23.7% Second largest customer 13.5 11.4 16.4 Third largest customer 10.2 7.5 16.4 The Company anticipates that a significant portion of its sales will continue to be concentrated in a relatively few number of customers for the foreseeable future. Unavailability of Components and Materials Components and material used by the Company in producing surface mount assemblies and turnkey solutions are purchased by the Company from approved suppliers. Any failure on the part of these suppliers to deliver required components to the Company or any failure of such components to meet performance requirements could impair the Company's ability to meet scheduled shipment dates and could delay sales of systems by the Company and, thereby, adversely affect the Company's business, financial condition and results of operations. The Company has in the past experienced shortages of certain types of electronic components, and may experience shortages of certain electronic components that are customer-supplied or are in short supply generally within the electronics industry. Currently, the Company is experiencing such shortages. In addition, the Company's customers may specify the particular manufacturers and components, such as the Intel Pentium microprocessor, to be used in the assembly process. To the extent these components are not available on a timely basis or are in short supply because of allocations imposed by the component manufacturer, and the customer is unwilling to accept a substitute component, delays may occur. Such delays are experienced in the EMS business from time to time and have caused sales and inventory fluctuations in the Company's business. Currently, the Company is experiencing such delays. Component shortages or price fluctuations, to the extent not absorbed by customers under their agreements with the Company, could have a material adverse effect on the Company's business, financial condition and results of operations. Certain components used in a number of the Company's customer programs are obtained from sole source suppliers. Variability of Customer Requirements The level and timing of purchase orders placed by the Company's customers are affected by a number of factors, including variation in demand for the customer's products, customer attempts to manage inventory and changes in the customer's manufacturing strategies. Many of these factors are outside of the control of the Company. Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty, except for payment for services rendered, materials purchased or procured and, in certain circumstances, charges associated with such cancellation, reduction or delay. Significant or numerous cancellations, reductions or delays in orders by customers, or inability by customers to pay for services provided by the Company or to pay for components and materials purchased by the Company on such customer's behalf, have adversely affected the Company's business, financial condition and results of operations in the past and could have a material adverse effect on the Company's business, financial condition and results of operations in the future. MARKETS AND CUSTOMERS The Company's sales and the percentage of its consolidated sales to the principal end-user markets it serves for the last three fiscal years were as follows (dollars in thousands): Year ended June 30, ------------------------------------------------------ Markets 2000 1999 1998 - -------------------- --------------- --------------- --------------- Industrial controls & instrumentation $13,542 19.3% $ 7,225 14.1% $ 2,568 5.8% Medical 12,985 18.5 4,311 8.4 2,649 5.9 Financial services automation 10,803 15.4 3,464 6.8 7,344 16.4 Defense 10,315 14.7 6,776 13.2 4,258 9.5 Computer 8,471 12.0 1,948 3.8 4,170 9.3 Telecommunications 6,110 8.7 9,683 18.9 8,241 18.4 Commercial avionics 5,234 7.4 15,130 29.6 11,333 25.4 Space and satellites 115 0.2 1,540 3.0 2,729 6.1 Other 2,677 3.8 1,098 2.2 1,398 3.2 ------- ----- ------- ----- ------- ----- Total $70,252 100.0% $51,175 100.0% $44,690 100.0% ======= ===== ======= ===== ======= ===== See Note 11 to the consolidated financial statements for information on the Company's revenues and long-lived assets by geographical area. The Company markets its EMS services through both direct sales personnel and through representatives from independent manufacturers. The Company's marketing strategy is to develop close relationships with, and to increase sales to, certain existing and new major OEM customers. This includes becoming involved at an early stage in the design of these customers' new products. The Company believes that this strategy is necessary to keep abreast of rapidly changing technological needs and to develop new EMS processes, thereby enhancing the Company's EMS capabilities and its position in the industry. As a result of this strategy, however, fluctuations experienced by one or more of these customers in demand for their products may have and have had adverse effects on the Company's sales and profitability. INDUSTRY CONDITIONS AND COMPETITION The markets in which the EMS business operate are intensely competitive and have experienced excess production capacity for many years. Seasonality is not a significant factor in the EMS business. Competition is principally based on price, product quality, technical capability and the ability to deliver products on schedule. Both the price of and the demand for EMS are sensitive to economic conditions, changing technologies and other factors. The technology used in EMS is widely available, and there are a large number of domestic and foreign competitors. Many of these firms are larger than the Company and have significantly greater financial, marketing and other resources. Many of the Company's competitors have also made substantial capital expenditures in recent years and operate technologically advanced EMS facilities. Furthermore, some of the Company's customers have substantial in-house EMS capabilities. There is a risk that when these customers are operating at less than full capacity they will use their own facilities rather than contract with the Company. Despite this risk, management believes that the Company has not experienced a significant loss of business to OEMs' captive assembly operations. BACKLOG At June 30, 2000, 1999 and 1998, the Company's backlog for its EMS operations was $53,399,000, $38,670,000 and $35,104,000, respectively. Backlog is comprised of orders believed to be firm for products that have scheduled shipment dates during the next 12 months. A substantial portion of the backlog is expected to be shipped within 180 days. Some orders in the backlog may be cancelled under certain conditions. In addition, the timing of orders from major customers may result in significant fluctuations in the Company's backlog and operating results from period to period. Accordingly, the Company believes that backlog may not be a reliable indicator of future operating results. ENVIRONMENTAL REGULATION The Company is currently involved in certain remediation and investigative studies regarding soil and groundwater contamination at the site of a former PCB manufacturing plant in Anaheim, California which was leased by one of the Company's former subsidiaries, Aeroscientific Corp. Under the terms of a cost sharing agreement entered into several years ago, the remaining remediation costs are expected to be borne on a 50-50 basis between the Company and the property owner. At June 30, 2000, the Company had a reserve of $447,000 for future remediation costs. Management, based in part on consultations with outside environmental engineers and scientists, believes that this reserve is adequate to cover its share of future remediation costs at this site. It is possible, however, that these future remediation costs could differ significantly from the estimates, and that the Company's portion could significantly exceed the amount of its reserve. The Company's liability for remediation in excess of its reserve could have a material adverse impact on its business, financial condition and results of operations. EMPLOYEES At June 30, 2000, the Company had approximately 575 employees. Item 2. PROPERTIES The following table lists principal plants and properties of the Company: Owned Square or Location Footage Leased Use - --------------------------- ------- ------ ------------------ Thousand Oaks, California 45,000 Leased Executive offices, assembly plant San Diego, California 18,000 Leased Assembly plant Fort Lauderdale, Florida 8,400 Leased Assembly plant Craigavon, Northern Ireland 67,000 Owned Assembly plant The Northern Ireland property is pledged as security for an installment loan payable to the Industrial Development Board ("IDB") for Northern Ireland, from which the property was purchased. This loan had an outstanding balance of approximately $747,000 at June 30, 2000. Item 3. LEGAL PROCEEDINGS In October 1999, a lawsuit was filed against the Company by two of its shareholders in the Superior Court of Ventura County, California. The action purports to arise out of the merger of the Company with Jolt in June 1998. The lawsuit asserts claims against the Company and certain of its present and former officers and directors and an income tax advisor for breach of contract, common law fraud, and violation of the California Corporate Securities Act. The lawsuit seeks damages in the amount of $3,500,000. Certain individual director or officer defendants have been dismissed or the court has ordered them to be dismissed. The action is now proceeding in discovery against the Company, the remaining officers and directors, and the income tax advisor. No trial date has been set at this time. The Company denies the allegations asserted in the lawsuit and is engaged in a vigorous defense of the matter. The Company believes that the plaintiffs' claims lack merit. Consequently, no amounts have been accrued in the consolidated financial statements for the potential outcome of this litigation at this time. Although the Company denies the allegations in the matter, there can be no assurance that the Company will prevail. An unfavorable result could adversely affect the Company's business, results of operations and/or financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders during the three months ended June 30, 2000. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Market and Dividend Information" in the Company's 2000 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five-Year Financial Summary" in the Company's 2000 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in the Company's 2000 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents, accounts receivable, and short-term and long-term debt. At June 30, 2000, the carrying amount of long-term debt (including current portion thereof) was $7,103,000 and the fair value was $6,629,000. The carrying values of the Company's other financial instruments approximated their fair values. The fair value of the Company's financial instruments is estimated based on quoted market prices for the same or similar issues. See Note 6 to the accompanying consolidated financial statements for maturities of long-term debt for the next five years. A change in interest rates of one percent would result in an annual impact on interest expense of approximately $90,000. It is the policy of the Company not to enter into derivative financial instruments for speculative purposes. The Company, from time to time, may enter into foreign currency forward exchange contracts in an effort to protect itself from adverse currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. These commitments are generally for terms of less than one year. The foreign currency forward exchange contracts are executed with banks believed to be creditworthy and are denominated in currencies of major industrial countries. Any gain or loss incurred on foreign currency forward exchange contracts is offset by the effects of currency movements on the respective underlying hedged transactions. The Company did not have any open foreign currency forward exchange contracts at June 30, 2000. A portion of the Company's operations consists of an investment in a foreign subsidiary. As a result, the Company's financial results have been and may continue to be affected by changes in foreign currency exchange rates. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements later in this Report under Item 14(a)(1). Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's proxy statement for its 2000 Annual Meeting of Stockholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K 2000 Annual Report to Stockholders ------------ (a)(1) List of Financial Statements List of data incorporated by reference: Report of KPMG LLP on consolidated financial statements 14 Consolidated balance sheets as of June 30, 2000 and 1999 15 Consolidated statements of operations and comprehensive income (loss) for the years ended June 30, 2000, 1999 and 1998 17 Consolidated statements of cash flows for the years ended June 30, 2000, 1999 and 1998 18 Consolidated statements of stockholders' equity for the years ended June 30, 2000, 1999 and 1998 19 Notes to consolidated financial statements 20 (a)(2) Financial Statement Schedules The financial statement schedules are omitted because they are either not applicable or the information is included in the notes to consolidated financial statements. Form 10-K --------- (a)(3) List of Exhibits: Exhibit Index 14 (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended June 30, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 25, 2000. SMTEK INTERNATIONAL, INC. /s/ Gregory L. Horton ----------------------- Gregory L. Horton Chief Executive Officer, President and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Gregory L. Horton Chief Executive Officer, August 25, 2000 - ----------------------- President and Chairman ------------------- Gregory L. Horton of the Board (principal executive officer) /s/ Richard K. Vitelle Vice President-Finance and August 25, 2000 - ----------------------- Administration, Chief ------------------- Richard K. Vitelle Financial Officer and Treasurer (principal financial officer) Director - ----------------------- ------------------- Clay M. Biddinger /s/ James P. Burgess Director August 23, 2000 - ----------------------- ------------------- James P. Burgess /s/ Bruce E. Kanter Director August 23, 2000 - ----------------------- ------------------- Bruce E. Kanter /s/ Oscar B. Marx Director August 23, 2000 - ----------------------- ------------------- Oscar B. Marx III EXHIBIT INDEX Exhibit Number Description - ------- ----------- 2.1 Agreement and Plan of Merger dated May 28, 1998 among the Company, Jolt Technology, Inc. and the shareholders of Jolt Technology, Inc. (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement dated June 12, 1998) 2.2 Stock Purchase Agreement dated January 24, 1999 between SMTEK International, Inc. and the shareholders of Technetics, Inc. (incorporated by reference to Exhibit 99-1 of the Company's Current Report on Form 8-K filed on February 12, 1999). 2.3 Agreement dated November 12, 1999 between DDL Europe, Ltd. (a subsidiary of the Company) and Fast Track Circuits, Ltd. for the sale of the capital stock of Irlandus Circuits, Ltd. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on December 28, 1999.) 3.1 Amended and Restated Certificate of Incorporation of SMTEK International, Inc. (incorporated by reference to Exhibit 3.1 of the Company's 1999 Annual Report on Form 10-K). 3.2 Bylaws of the Company, amended and restated effective August 23, 2000. 4.1 Indenture dated July 15, 1988, applicable to the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 2008 (incorporated by reference to Exhibit 4-c of the Company's 1988 Annual Report on Form 10-K). 4.1.1 Supplemental Indenture relating to the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 2008 (incorporated by reference to Exhibit 4-b of the Company's 1991 Annual Report on Form 10-K). 4.2 Indenture relating to the Company's 7% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4-c of the Company's 1991 Annual Report on Form 10-K). 4.3 Form of Series E Warrant dated February 29, 1996 covering an aggregate 1,500,000 shares and expiring on February 28, 2001 (incorporated by reference to Exhibit 4-n of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 10.1 1993 Stock Incentive Plan (incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-8, Commission file No. 33-74400). 10.2 Amended and Restated 1996 Stock Incentive Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement for the fiscal 1999 Annual Stockholders Meeting). 10.3 Amended and Restated 1998 Non-Employee Directors Stock Plan (incorporated by reference to Exhibit B of the Company's Proxy Statement for the fiscal 1999 Annual Stockholders Meeting). 10.4 Standard Industrial Lease-Net dated August 1, 1984, among the Company, Aeroscientific Corp., and Bradmore Realty Investment Company, Ltd. (incorporated by reference to Exhibit 10-w of the Company's 1990 Annual Report on Form 10-K). 10.4.1 Second Amendment to Lease among Bradmore Realty Investment Company, Ltd., the Company and the Company's Aeroscientific Corp. subsidiary, dated July 2, 1993 (incorporated by reference to Exhibit 10-cd of Registration Statement No. 33-63618). 10.5 Grant Agreement dated August 29, 1989, between SMTEK Europe Limited (fka DDL Electronics Limited) and the IDB for Northern Ireland ("IDB") (incorporated by reference to Exhibit 10.29 of the Company's Registration Statement No. 33-39115). 10.5.1 Agreement dated May 2, 1996, between SMTEK Europe Limited and the IDB amending the Grant Agreement dated August 29, 1989 (incorporated by reference to Exhibit 10.11.1 filed with the Company's 1996 Annual Report on Form 10-K). 10.6 Employment Agreement dated September 12, 1996 between the Company and Richard K. Vitelle (incorporated by reference to Exhibit 10.15 filed with the Company's 1996 Annual Report on Form 10-K). 11 Statement re Computation of Per Share Earnings (incorporated by reference to Note 9 to the consolidated financial statements of the 2000 Annual Report to Stockholders). 13 Annual Report to security holders. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 27 Financial Data Schedule. 99 Undertaking for Form S-8 Registration Statement. EX-3 2 0002.txt Exhibit 3.2 SMTEK INTERNATIONAL, INC. (a Delaware corporation) BYLAWS (Amended and Restated Effective August 23, 2000) ARTICLE I Offices SECTION 1.01 Registered Office. The registered office of SMTEK International, Inc. (the "Corporation") in the State of Delaware shall be in care of The Corporation Trust Company, located at 1209 Orange Street, City of Wilmington, County of New Castle, zip code 19801. SECTION 1.02 Other Offices. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time determine or as the business of the Corporation may require. ARTICLE II Meetings of Stockholders SECTION 2.01 Annual Meetings. Annual meetings of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings may be held at such time, date and place as the Board shall determine by resolution. SECTION 2.02 Special Meetings. A special meeting of the stockholders for the transaction of any proper business may be called at any time by the Board for a majority of the Board. Special meetings may not be called by any other person or persons or in any other manner. SECTION 2.03 Place of Meetings. All meetings of the stockholders shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the person or persons calling the respective meeting and specified in the respective notices or waivers of notice thereof. SECTION 2.04 Notice of Meetings. Except as otherwise required by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to him personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to him at his post office address furnished by him to the Secretary of the Corporation for such purpose or, if he shall not have furnished to the Secretary his address for such purpose, then at his post office address last known to the Secretary, or by transmitting a notice thereof to him at such address by telegraph, cable, or wireless. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. Every notice of a meeting of the stockholders shall state the place, date and hour of the meeting, and, in the case of a special meeting, shall also state the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall have waived such notice and such notice shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, except as a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. SECTION 2.05 Quorum. Except in the case of any meeting for the election of directors summarily ordered as provided by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders of the Corporation or any adjournment thereof. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat, in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.06 Voting. (a) Each stockholder shall, at each meeting of the stockholders, be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by him and registered in his name on the books of the Corporation: (i) on the date fixed pursuant to Section 6.05 of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or (ii) if no such record date shall have been so fixed, then (a) at the close of business on the day next preceding the day on which notice of the meeting shall be given or (b) if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which the meeting shall be held. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants in common, tenants by entirety or otherwise or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the General Corporation Law of the State of Delaware. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless he shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of the stockholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat and thereon, a quorum being present. The voting at any meeting of the stockholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and it shall state the number of shares voted. SECTION 2.07 List of Stockholders. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting during ordinary business hours, for a period of at least ten (1O) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.08 Judges. If at any meeting of the stockholders a vote by written ballot shall be taken on any question, the chairman of such meeting may appoint a judge or judges to act with respect to such vote. Each judge so appointed shall first subscribe an oath faithfully to execute the duties of a judge at such meeting with strict impartiality and according to the best of his ability. Such judges shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of judges shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The judges need not be stockholders of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which he shall have a material interest. SECTION 2.09 No Action Without Meeting. No action may be taken by stockholders except at an annual or special meeting of stockholders. No action may be taken by stockholders by written consent. SECTION 2.10. Stockholder Proposals. Only stockholders of record shall be entitled to present a stockholder proposal at any meeting of the stockholders. Before a stockholder of record may present such a proposal, the stockholder of record must deliver timely notice of such proposal to the Company. To be timely, a stockholder of record's notice of a proposal to be presented at an annual meeting shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days prior to or more than sixty (60) days after such anniversary date, notice by the stockholder of record to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the tenth (10th) day following the date on which public announcement of the date of such meeting is first made. A stockholder of record's notice of a proposal to be presented at a special meeting shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such special meeting or the tenth (10th) day following the date on which public announcement of the date of such special meeting is first made. ARTICLE III Board of Directors SECTION 3.01 General Powers. The property, business and affairs of the Corporation shall be managed by the Board. SECTION 3.02 Number and Term of Office. The number of directors shall be five (5). Directors need not be stockholders. Each of the directors of the Corporation shall hold office until his successor shall have been duly elected and shall qualify or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3.03 Election of Directors. The directors shall be elected annually by the stockholders of the Corporation and the persons receiving the greatest number of votes, up to the number of directors then to be elected, shall be the persons then elected. The election of directors is subject to any provisions contained in the Certificate of Incorporation relating thereto, including any provisions for a classified Board and for cumulative voting. SECTION 3.04 Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.05 Vacancies. Except as otherwise provided in the Certificate of Incorporation, any vacancy in the Board, whether because of death, resignation, disqualification, an increase in the number of directors, or any other cause, can be filled only by a vote of the majority of the remaining directors, although less than a quorum. Subject to further Resolution of the Board prescribing a shorter time, each director so chosen to fill a vacancy shall hold office until his successor shall have been elected and shall qualify or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3.06 Place of Meeting, Etc. The Board may hold any of its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 3.07 First Meeting. The Board shall meet as soon as practicable after each annual election of directors and notice of such first meeting shall not be required. SECTION 3.08 Regular Meetings. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. SECTION 3.09 Special Meetings. Special meetings of the Board shall be held whenever called by the President or a majority of the authorized number of directors. Except as otherwise provided by law or by these Bylaws, notice of the time and place of each such special meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least two (2) days before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph, facsimile transmission, e- mail and/or cable or be delivered personally not less than forty-eight (48) hours before the time at which the meeting is to be held. Except where otherwise required by law or by these Bylaws, notice of the purpose of a special meeting need not be given. Notice of any meeting of the Board shall not be required to be given to any director who is present at such meeting, except a director who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3.10 Quorum and Manner of Acting. Except as otherwise provided in these Bylaws or by law, the presence of a majority of the authorized number of directors shall be required to constitute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the directors present. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board, and the individual directors shall have no power as such. SECTION 3.11 Action by Consent. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 3.12 Removal of Directors. Subject to the provisions of the Certificate of Incorporation, a director may be removed only with cause and by the affirmative vote of the stockholders holding a majority of the issued and outstanding shares of the Corporation, given at a special meeting of the stockholders called for the purpose. SECTION 3.13 Compensation. The directors shall receive only such compensation for their services as directors as may be allowed by resolution of the Board. The Board may also provide that the Corporation shall reimburse each such director for any expense incurred by him on account of his attendance at any meetings of the Board or committees of the Board. Neither the payment of such compensation nor the reimbursement of such expenses shall be construed to preclude any director from serving the Corporation or its subsidiaries in any other capacity and receiving compensation therefor. SECTION 3.14 Committees. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board and except as otherwise limited by law, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Any such committee shall keep written minutes of its meetings and report the same to the Board at the next regular meeting of the Board. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. ARTICLE IV Officers SECTION 4.01 Number. The officers of the Corporation shall be a President, one or more Vice Presidents (the number thereof and their respective titles to be determined by the Board), a Secretary and a Treasurer. SECTION 4.02 Election, Term of Office and Qualifications. The officers of the Corporation, except such officers as may be appointed in accordance with Section 4.03, shall be elected annually by the Board at the first meeting thereof held after the election thereof. Each officer shall hold office until his successor shall have been duly chosen and shall qualify or until his resignation or removal in the manner hereinafter provided. SECTION 4.03 Assistants, Agents and Employees, Etc. In addition to the officers specified in Section 4.01, the Board may appoint other assistants, agents and employees as it may deem necessary or advisable, including one or more Assistant Secretaries, and one or more Assistant Treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as the Board may from time to time determine. The Board may delegate to any officer of the Corporation or any committee of the Board the power to appoint, remove and prescribe the duties of any such assistants, agents or employees. SECTION 4.04 Removal. Any officer, assistant, agent or employee of the Corporation may be removed, with or without cause, at any time: (i) in the case of an officer, assistant, agent or employee appointed by the Board, only by resolution of the Board; and (ii) in the case of an officer, assistant, agent or employee, by any officer of the Corporation or committee of the Board upon whom or which such power of removal may be conferred by the Board. SECTION 4.05 Resignations. Any officer or assistant may resign at any time by giving written notice of his resignation to the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof by the Board or the Secretary, as the case may be; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.06 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or other cause, may be filled for the unexpired portion of the term thereof in the manner prescribed in these Bylaws for regular appointments or elections to such office. SECTION 4.07 The President. The President of the Corporation shall be the chief executive officer of the Corporation and shall have, subject to the control of the Board, general and active supervision and management over the business of the Corporation and over its several officers, assistants, agents and employees. SECTION 4.08 The Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board may from time to time prescribe. At the request of the President, or in case of the President's absence or inability to act upon the request of the Board, a Vice President shall perform the duties of the President and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. SECTION 4.09 The Secretary. The Secretary shall, if present, record the proceedings of all meetings of the Board, of the stockholders, and of all committees of which a secretary shall not have been appointed in one or more books provided for that purpose; he shall see that all notices are duly given in accordance with these Bylaws and as required by law; he shall be custodian of the seal of the Corporation and shall affix and attest the seal to all documents to be executed on behalf of the Corporation under its seal; and, in general, he shall perform all the duties incident to the office of Secretary and such other duties as may from time to time be assigned to him by the Board. SECTION 4.10 The Treasurer. The Treasurer shall have the general care and custody of the funds and securities of the Corporation, and shall deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected by the Board. He shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever. He shall exercise general supervision over expenditures and disbursements made by officers, agents and employees of the Corporation and the preparation of such records and reports in connection therewith as may be necessary or desirable. He shall, in general, perform all other duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board. SECTION 4.11 Compensation. The compensation of the officers of the Corporation shall be fixed from time to time by the Board. None of such officers shall be prevented from receiving such compensation by reason of the fact that he is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary corporation, in any other capacity and receiving such compensation by reason of the fact that he is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary corporation, in any other capacity and receiving proper compensation therefor. ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. SECTION 5.01 Execution of Contracts. The Board, except as in these Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board or by these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 5.02 Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such officer, assistant, agent or attorney shall give such bond, if any, as the Board may require. SECTION 5.03 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the President, any Vice President or the Treasurer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. SECTION 5.04 General and Special Bank Accounts. The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE VI Shares and Their Transfer SECTION 6.01 Certificates for Stock. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by him. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the President or a Vice President, and by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any of or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 6.04. SECTION 6.02 Transfers of Stock. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 6.03, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 6.03 Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. SECTION 6.04 Lost, Stolen, Destroyed, and Mutilated Certificates. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do. SECTION 6.05 Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If in any case involving the determination of stockholders for any purpose other than notice of or voting at a meeting of stockholders or expressing consent to corporate action without a meeting the Board shall not fix such a record date, the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. A determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VII Indemnification SECTION 7.01 Actions, Etc. Other Than by or in the Right of the Corporation. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal, administrative, and whether external or internal - to the Corporation (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or, while serving as a director or officer, is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, trustee, employee or agent or in any other capacity, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by law, including, but not limited to, the Delaware General Corporation Law, as the same exists or may thereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment), against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of no contest or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. SECTION 7.02 Actions, Etc. by or in the Right of the Corporation. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer, employee or agent of the Corporation, or, while serving as a director or officer, is or was serving at the request of the Corporation as a director, officer, employee, trustee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, trustee, employee or agent or in any other capacity, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by law, including, but not limited to, the Delaware General Corporation Law, as the same exists or may thereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment), against all expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03 Determination of Right of Indemnification. Any indemnification under Section 7.01 or 7.02 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 7.01 and 7.02. Such determination shall be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. SECTION 7.04 Indemnification Against Expenses of Successful Party. Notwithstanding the other provisions of this Article, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or' otherwise in defense of any action, suit or proceeding referred to in Section 7.01 or 7.02, or in defense of any claim, issue or matter therein, he shall be indemnified against all expenses (including attorneys' fees) incurred by him in connection therewith. SECTION 7.05 Prepaid Expenses. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. SECTION 7.06 Right to Indemnification Upon Application; Procedure Upon Application. Any indemnification under or advancement of expenses provided by, or granted pursuant to, this Article shall be made promptly, and in any event within ninety days, upon written request of the director or officer, employee or agent, unless with respect to applications under Section 7.02 and 7.03, a determination is reasonably and promptly made by the Board by a majority vote of quorum of disinterested directors that such director or officer, employee or agent acted in a manner set forth in such Sections as to justify the Corporation's not indemnifying the director or officer, employee or agent. In the event no quorum of disinterested directors is obtainable, the Board shall promptly direct that independent legal counsel shall decide whether the director or officer, employee or agent acted in a manner set forth in such Sections as to justify the Corporations not indemnifying or making an advance to the director or officer or, in the case of indemnification, employee or agent. The right to indemnification under or advancement of expenses provided by this Article shall be enforceable by the director, officer, employee or agent in any court of competent jurisdiction, if the Board or independent legal counsel denies the claim, in whole or in part, or if no disposition of such claim is made within ninety days. The director's, officer's, employee's or agent's expenses incurred in connection with successfully establishing his right to indemnification or advancement of expenses, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. SECTION 7.07 Other Rights and Remedies. The indemnification under and advancement of expenses provided by, or granted pursuant to, this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The right to be indemnified or to the reimbursement or advancement of expenses pursuant hereto (i) is a contract right based upon good and valuable consideration, pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the Corporation and the director or officer, employee or agent, (ii) is intended to be retroactive and shall be available with respect to events occurring prior to the adoption hereof, and (iii) shall continue to exist after the rescission or restrictive modification hereof with respect to events occurring prior thereto. SECTION 7.08 Insurance. Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation, as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. SECTION 7.09 Constituent Corporations. For the purposes of this Article, references to "the Corporation" include any constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee, trustee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. SECTION 7.10 Other Enterprises, Fines, and Serving at Corporation's Request. For purposes of this Article, references to "other enterprises" shall include employee benefit plan; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee, trustee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, trustee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. SECTION 7.11 Savings Clause. If this Article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee or agent as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated or by any other applicable law. SECTION 7.12 Liability of Directors for Breaches of Fiduciary Duty. Notwithstanding any provision to the contrary contained in these Bylaws, to the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. ARTICLE VIII Miscellaneous SECTION 8.01 Seal. The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that the Corporation was incorporated in the State of Delaware and the year of incorporation. SECTION 8.02 Waiver of Notices. Whenever notice is required to be given by these Bylaws or the Certificate of Incorporation or by law, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. SECTION 8.03 Amendments. Notwithstanding any provision herein to the contrary, these Bylaws, or any of them, may be altered, amended or repealed, and new Bylaws may be made only (i) by the Board, by the affirmative vote of a majority of the number of the Board; or (ii) by the stockholders, by an affirmative vote of the stockholders holding a majority of the issued and outstanding shares of the Corporation given at any annual meeting or special meeting of the stockholders, provided that notice of such proposed amendment, modification, repeal or adoption is timely given in the manner hereinabove provided. Any Bylaws made or altered by the stockholders may be altered or repealed by either the Board or the stockholders. EX-13 3 0003.txt EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (In thousands except per share amounts) Year Ended June 30, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Revenues $70,252 $51,175 $44,690 $41,336 $24,600 Operating income (loss) $ 820 $ (89) $ 857 $ 397 $ (532) Loss from continuing operations before income taxes $ (134) $(1,632) $ (285) $(1,571) $(1,532) Income tax (expense) benefit $ (100) $(1,202) $ - $ - $ 1,110 Loss from continuing operations $ (234) $(2,834) $ (285) $(1,571) $ (422) Income from discontinued operations $ 254 $ 339 $ 778 $ 703 $ 155 Loss on sale of discontinued operations $ (661) $ - $ - $ - $ - Extraordinary item $ - $ - $ - $ - $ 2,356 Net income (loss) $ (641) $(2,495) $ 493 $ (868) $ 2,089 Earnings (loss) per common share $ (0.28) $ (1.41) $ 0.34 $ (0.63) $ 1.85 DESCRIPTION OF BUSINESS SMTEK International, Inc. (the "Company") is an electronics manufacturing services ("EMS") provider to original equipment manufacturers ("OEMs") primarily in the computer, telecommunications, instrumentation, medical, financial services automation, industrial and aerospace industries. The Company provides integrated solutions to OEMs across the entire product life cycle, from design to manufacturing to end-of-life services, for the worldwide low-to-medium volume, high complexity segment of the EMS industry. The Company's operating units are located in Thousand Oaks, California; San Diego, California; Fort Lauderdale, Florida; and Craigavon, Northern Ireland. PRESIDENT'S LETTER TO STOCKHOLDERS DEAR FELLOW STOCKHOLDERS: We entered fiscal 2000 uncertain of how the Company would fare under the difficult market conditions which began in the previous year and which had adversely affected our Company as well as many companies within our industry. I am proud to say that we not only met those market challenges head-on with a very focused strategy, but we grew the Company's revenues by 37% to $70.3 million, up from $51.2 million in the year before. Our reputation for high quality, strong customer service and the ability to develop and produce complex electronic products has attracted new business from customers who have not been satisfied by other manufacturers. Our backlog of firm orders at June 30, 2000 was $53.4 million, up 38% from $38.7 million at the close of fiscal 1999. The strong bookings have continued into our new fiscal year 2001. We therefore expect a significant increase in revenue in fiscal 2001, although supply-chain difficulties could dampen revenue for at least the first quarter of fiscal 2001. STRATEGIC TRANSACTIONS AND SHARPENED OPERATING FOCUS Since June 1998 we have acquired two companies and divested one. During fiscal 2000 we focused our efforts on building infrastructure to support additional acquisitions while at the same time refining our operating performance in our existing operations. We anticipated that our rapid growth and the capital investment required in our existing operations would create the need for additional cash. In fiscal 2000, we sold our subsidiary Irlandus Circuits Ltd., ("Irlandus") located in Northern Ireland, for approximately $4.5 million. Irlandus was our only remaining printed circuit board fabrication company and its divestiture allows us to focus on our core competency of electronics manufacturing services ("EMS"). STRONG FOURTH QUARTER RESULTS We were pleased to close fiscal 2000 on a strong note. Fourth quarter revenues advanced by 63% to $21.4 million from $13.1 million one year earlier. Net income for the quarter totaled $161,000, equal to $0.07 per share, compared with a net loss of $3.0 million in the same period last year. The prior year fourth quarter loss reflected special charges of $1.8 million related to an income tax assessment and $487,000 for increased inventory reserves. All of our operating units were profitable in the fourth quarter of fiscal 2000, and in particular, results were powered by strong performance from our two Southern California operations. In the past 18 months the market conditions were devastating to the EMS industry in Europe. Our Northern Ireland EMS operation sustained heavy losses in the first three quarters of fiscal 2000. With new management, this operation has since rebounded nicely and was back in the black in the fourth quarter of fiscal 2000. The losses in Northern Ireland in the first three quarters, however, partially masked the strong operating performance exhibited by our domestic subsidiaries. PERSPECTIVE ON FINANCIAL RESULTS As previously stated, revenues for the year ended June 30, 2000 grew 37% to $70.3 million, up from $51.2 million in the prior year. The revenue increase was driven by robust demand for the high-mix and high-complexity electronics manufacturing services at our two Southern California companies. This rapid sales growth was due to ramp-up of a number of existing and new accounts in our Thousand Oaks operation and the new customer base which we established at our San Diego facility, which we acquired last year. Gross profit for the year totaled $7.9 million, up 20% from $6.6 million in fiscal 1999. While our gross profit percentage has decreased to 11.3% from 12.8% as a result of our ramp-up in sales and a change in business mix, it is still higher than the weighted average 8% gross profit percentage of the other public EMS companies. Due to increased revenue in fiscal 2000, our administrative and selling expenses decreased sharply as a percent of sales, dipping to 8.2%, from 10.5% of sales one year ago. The Company posted a positive swing of over $900,000 in operating income, which rose to $820,000 from a deficit of $89,000 in the year before. Net loss for fiscal 2000 was $641,000, or $0.28 per share after giving effect to a loss on the sale of Irlandus of $661,000. Excluding the non- recurring charge associated with the sale, net income was $20,000, or $0.01 per share. Although far from satisfactory, this result represents an improvement from fiscal 1999, in which the Company experienced a net loss of $660,000, or $0.37 per share, excluding non-recurring tax-related charges. GROWTH AND PROFITS IN SAN DIEGO Our management team at the San Diego facility has achieved significant progress over the past eighteen months in turning around this newly acquired, but under-booked, operation. The San Diego facility was operating in the red at the time of acquisition and it is now demonstrating consistent and solid earnings. We have been successful in broadening and expanding the business base with the addition of several large commercial accounts. The January 1999 acquisition of our San Diego operation, which is ISO- 9002 registered, was in line with our strategy of adding high-mix, high- quality and technically capable midsize EMS providers in targeted geographic markets with significant concentrations of high-tech activity. With its concentration of high-tech original equipment manufacturers and significant requirements for high-complexity, high-mix work, the San Diego market is an excellent fit with our strategic growth criteria. We are enthusiastic about our opportunities for further growth and progress in the San Diego market. BUILDING OUR INFRASTRUCTURE: ON-LINE CAPABILITIES The Company is working actively to increase its capabilities, enhance efficiency and service, and make it easier for our customers to do business with SMTEK. In line with these goals, we have launched a number of important Internet customer service initiatives. Internally, we have developed substantive reporting capabilities and management systems available on our intranet that will be ported across the Internet to all of our operating units. Along with this investment in "on- line infrastructure," we have invested heavily in training and recruiting the right talent within all of our organizations. The Company's investment in infrastructure, customer relationship management tools, reporting systems, training and talented personnel will provide exceptional long-term competitive benefits to the EMS companies that have and will become part of our team. SUMMARY AND OUTLOOK As indicated above, we are enthusiastic about the long-term prospects for our Company and our industry. However, the immediate outlook must be cautionary, at least with respect to the first quarter of fiscal 2001 because the entire industry is currently experiencing serious revenue limitations due to severe shortages of certain electronic components. Such shortages, which occur periodically in our industry, typically result in a difficult operating climate where preemptive orders, double bookings and the need to seek brokered parts are pervasive. We are concerned about the potential impact of these shortages on the first quarter and beyond since shipments may be delayed due to the unavailability of parts, resulting in idle production capacity. When the current component supply/demand imbalance normalizes, as it has in the past, our Company will be well positioned for progress. Demand for our services is robust and expanding. Starting in January 2001, our operating results will benefit from no longer being burdened by goodwill amortization of $324,000 each quarter or $1.3 million annually. We therefore expect improved earnings in fiscal 2001 and beyond. In terms of objectives, we will continue to focus on improving the operating efficiency and profitability of our current group of companies. Strengthening materials management will be a key avenue toward our goal of enhanced performance. At the same time, we will continue to evaluate acquisition opportunities in line with our core strategy of building a network of EMS suppliers in local markets around the world. In closing, we would like to express our sincere appreciation to our customers for their business, as well as to our suppliers and business partners. Special thanks go to all of our people for their hard work, energy and enthusiasm. Our most special thanks goes to our fellow stockholders for their interest and support. /s/Gregory L. Horton - --------------------- Gregory L. Horton Chairman, CEO and President SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) Year ended June 30, ------------------------------------------- OPERATING DATA 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Revenues $70,252 $51,175 $44,690 $41,336 $24,600 Cost of goods sold 62,345 44,605 37,392 35,657 21,260 ------- ------- ------- ------- ------- Gross profit 7,907 6,570 7,298 5,679 3,340 ------- ------- ------- ------- ------- Operating expenses: Administrative and selling expenses 5,783 5,375 4,564 4,014 3,238 Goodwill amortization 1,304 1,284 1,268 1,268 634 Acquisition expenses - - 609 - - ------- ------- ------- ------- ------- Total operating expenses 7,087 6,659 6,441 5,282 3,872 ------- ------- ------- ------- ------- Operating income (loss) 820 (89) 857 397 (532) ------- ------- ------- ------- ------- Non-operating income (expense): Interest income 166 96 47 75 225 Interest expense (1,057) (1,700) (1,113) (1,197) (1,116) Debt issue cost amortization - - - (937) (281) Other income (expense), net (63) 61 (76) 91 172 ------- ------- ------- ------- ------- Total non-operating expense (954) (1,543) (1,142) (1,968) (1,000) ------- ------- ------- ------- ------- Loss from continuing operations before income taxes (134) (1,632) (285) (1,571) (1,532) Income tax (expense) benefit (100) (1,202) - - 1,110 ------- ------- ------- ------- ------- Loss from continuing operations (234) (2,834) (285) (1,571) (422) Income from discontinued operations, net of tax 254 339 778 703 155 Loss on sale of discontinued operations, net of tax (661) - - - - Extraordinary item - Gain on debt extinguishment, net of tax - - - - 2,356 ------- ------- ------- ------- ------- Net income (loss) $ (641) $(2,495) $ 493 $ (868) $ 2,089 ======= ======= ======= ======= ======= SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) (Continued) Year ended June 30, ------------------------------------------- OPERATING DATA 2000 1999 1998 1997 1996 (Continued) ------- ------- ------- ------- ------- Earnings (loss) per share: Basic and diluted: Loss from continuing operations $ (0.10) $ (1.60) $ (0.20) $ (1.14) $ (0.37) Income from discontinued operations 0.11 0.19 0.54 0.51 0.13 Loss on sale of discontinued operations (0.29) - - - - Extraordinary item - - - - 2.09 ------- ------- ------- ------- ------- Total $ (0.28) $ (1.41) $ 0.34 $ (0.63) $ 1.85 ======= ======= ======= ======= ======= Year ended June 30, ------------------------------------------- BALANCE SHEET DATA 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Current assets $30,429 $27,854 $21,505 $21,597 $16,398 Current liabilities $24,056 $23,042 $17,060 $18,509 $12,256 Working capital $ 6,373 $ 4,812 $ 4,445 $ 3,088 $ 4,142 Current ratio 1.3 1.2 1.3 1.2 1.3 Total assets $38,528 $39,499 $31,802 $33,593 $29,453 Long-term debt $ 4,997 $ 7,153 $ 7,186 $ 9,445 $12,560 Stockholders' equity $ 9,475 $ 9,304 $ 7,556 $ 5,639 $ 4,637 Equity per share $ 4.17 $ 4.10 $ 4.43 $ 3.90 $ 3.53 Shares outstanding (000s) 2,272 2,267 1,704 1,447 1,315 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BASIS OF PRESENTATION The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 2000, 1999 and 1998, fell on June 30, July 2, and July 3, respectively. In the accompanying consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation. Fiscal years 2000 and 1999 each consisted of 52 weeks compared to 53 weeks for fiscal year 1998. As more fully described in the accompanying consolidated financial statements, the Company sold its printed circuit board ("PCB") operation, Irlandus Circuits Ltd. ("Irlandus"), on November 12, 1999. Accordingly, Irlandus is shown as a discontinued operation for all periods presented in the accompanying consolidated statements of operations and comprehensive income (loss). As more fully described in the accompanying consolidated financial statements, the Company's acquisition of Technetics, Inc. on January 29, 1999 was accounted for under the purchase method of accounting, and its operating results have been included in the accompanying consolidated financial statements since the date of acquisition. RESULTS OF OPERATIONS The following table sets forth the Company's comparative revenues and other operating data as percentages of revenues: Year Ended June 30, ---------------------------- 2000 1999 1998 ------ ------ ------ Revenues 100.0% 100.0% 100.0% Cost of goods sold 88.7 87.2 83.7 ----- ----- ----- Gross profit 11.3 12.8 16.3 Administrative and selling expenses 8.2 10.5 10.2 Goodwill amortization 1.9 2.5 2.8 Acquisition expenses - - 1.4 ----- ----- ----- Operating income (loss) 1.2 (0.2) 1.9 Interest income 0.2 0.2 0.1 Interest expense (1.5) (3.3) (2.5) Other income (expense), net (0.1) 0.1 (0.1) ----- ----- ----- Loss from continuing operations before income taxes (0.2) (3.2) (0.6) Income tax expense (0.1) (2.3) - ----- ----- ----- Loss from continuing operations (0.3) (5.5) (0.6) Income (loss) from discontinued operations (0.6) 0.7 1.7 ----- ----- ----- Net income (loss) (0.9)% (4.8)% 1.1% ===== ===== ===== FISCAL 2000 VS. 1999 Consolidated revenues for fiscal 2000 were $70,252,000 compared to $51,175,000 for fiscal 1999. The increase in revenues of $19,077,000 is primarily due to an increase in sales of approximately $6,932,000 by the Company's San Diego operating unit, which was acquired using the purchase method of accounting on January 29, 1999; increased business from certain domestic customers; and new contracts obtained by the Company's Northern Ireland EMS operating unit. Consolidated gross profit for fiscal 2000 was $7,907,000 (11.3% of sales) compared to $6,570,000 (12.8% of sales) for fiscal 1999. The increase in gross profit of $1,337,000 was due to the Company's increased sales for the year as described above. Despite the 20% increase in gross profit, there was a decrease in the gross profit percentage primarily due to difficulties experienced by the Company's Northern Ireland operating unit in ramping up its production volume and manufacturing capacity for several new assembly contracts. Also contributing to the decline in gross profit percentage were material procurement and production inefficiencies caused by industry-wide shortages of certain electronic components, as well as the Company accepting more turnkey business in fiscal 2000. Administrative and selling expenses were $5,783,000 for fiscal 2000 compared to $5,375,000 for fiscal 1999. The increase of $408,000 was due primarily to the inclusion of the results of the San Diego operating unit, which was acquired in January 1999. This increase was offset partially by decreases in expenses in the Company's Thousand Oaks and Northern Ireland operating units. Total non-operating expense was $954,000 for fiscal 2000 compared to $1,543,000 for fiscal 1999. The primary reason for the $589,000 decrease is the accrual of interest expense of $725,000 in fiscal 1999 related to an income tax assessment, as more fully described below. The provision for income taxes was $100,000 for fiscal 2000 compared to $1,202,000 for fiscal 1999. Although the Company does not have an ordinary federal or foreign income tax liability on its current income due to the existence and utilization of net operating loss carryforwards for U.S. and United Kingdom income tax purposes, the Company is subject to certain state taxes and the alternative minimum taxation regulations of the U.S. federal and California tax codes. The income tax provision for fiscal 2000 consists of Florida state income tax, as well as U.S. federal and California alternative minimum income taxes. As more fully described in Note 7 to the accompanying consolidated financial statements, in the fourth quarter of fiscal 1999 the Company accrued income tax expense of $1,110,000 relating to tax refunds received in fiscal 1996 which were substantially disallowed by the Internal Revenue Service ("IRS") in fiscal 1999. Also in the fiscal 1999 fourth quarter, the Company accrued interest expense of $725,000 relating to the fiscal 1996 income tax refunds which are repayable to the IRS. The Company is awaiting a resolution from the IRS with regards to this issue. The tax filings which resulted in the Company receiving these refunds in fiscal 1996 were made after extensive consultation with a prominent tax advisor. Net loss from continuing operations for fiscal 2000 was $234,000 or $0.10 per share, compared to a net loss from continuing operations for fiscal 1999 of $2,834,000 or $1.60 per share. FISCAL 1999 VS. 1998 Consolidated revenues for fiscal 1999 were $51,175,000 compared to $44,690,000 for fiscal 1998. Revenues increased by $6,485,000 over fiscal 1998 primarily due to several new contracts obtained by the Thousand Oaks operating unit. Also contributing to the increase was $1,831,000 of sales by the Company's San Diego operating unit, acquired on January 29, 1999. Consolidated gross profit for fiscal 1999 was $6,570,000 (12.8% of revenues) compared to $7,298,000 (16.3% of revenues) for fiscal 1998. The decrease in gross profit of $728,000 was due to the following factors: the ramp-up of several new contracts in fiscal year 1999, an increase in inventory reserves for excess raw materials, and a change in the mix of business, with higher direct material costs as a percentage of revenues in fiscal 1999. Administrative and selling expenses for fiscal 1999 were $5,375,000, compared to $4,564,000 in fiscal 1998. The increase of $811,000 was largely attributable to the inclusion of the Company's San Diego operating unit, which was acquired in January 1999. Results for fiscal 1998 include acquisition expenses of $609,000 related to the purchase of the Company's Fort Lauderdale operating unit which was accounted for as a pooling of interests. There was an operating loss of $89,000 for fiscal 1999, compared to operating income of $857,000 for fiscal 1998. This decline was primarily attributable to the decreased gross profit and higher administrative and selling expenses in fiscal 1999, partially offset by acquisition expenses in fiscal 1998 which did not recur in fiscal 1999. Interest expense (excluding interest expense of $725,000 related to an income tax assessment as discussed above) decreased from $1,113,000 in fiscal 1998 to $975,000 in fiscal 1999. The decrease in interest expense was primarily due to the fact that notes of $1,625,000 that were payable by Jolt Technology, Inc. ("Jolt") to a Jolt shareholder were converted to Jolt common stock on June 30, 1998 as a condition of and prior to the acquisition of Jolt by the Company. Jolt's pre-acquisition interest expense is included in the Company's consolidated statement of operations pursuant to the pooling-of- interests accounting method. The net loss from continuing operations for fiscal 1999 was $2,834,000, or $1.60 per share, compared to a net loss from continuing operations of $285,000, or $0.20 per share for fiscal 1998. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued, which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal year ending June 30, 2001. Management does not anticipate that the adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The objective of SAB No. 101 is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. The Company is required to follow the guidance in SAB No. 101 no later than the fourth quarter of its fiscal year 2001. The SEC has recently indicated that it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, the Company is unable to assess the impact, if any, it may have. However, based on current guidance, the Company believes adoption of SAB No. 101 will not have a material impact on the Company's financial position or results of operations. The Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain Transactions Involving Stock Compensation." Interpretation No. 44 provides criteria for the recognition of compensation expense in certain stock-based compensation arrangements that are accounted for under Accounting Principles Board Opinion No. 25, "Accounting for Stock-Based Compensation." Interpretation No. 44 is effective July 1, 2000, with certain provisions that are effective retroactively to December 15, 1998 and January 12, 2000. The Company adopted Interpretation No. 44 effective July 1, 2000. Management does not believe that Interpretation No. 44 will have a material impact on the Company's financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $532,000 at the end of fiscal 2000, and its unused bank lines of credit of approximately $2.6 million at June 30, 2000. During fiscal 2000, cash and cash equivalents decreased by $4,465,000. This decrease consisted of cash used in operating activities of $7,685,000 and purchases of equipment of $2,241,000, partially offset by net cash provided by financing activities of $2,555,000 and net cash proceeds from the sale of discontinued operations of $2,689,000. Cash used in operating activities of $7,685,000 is attributable primarily to increases of $5,104,000 in accounts receivable and $4,019,000 in costs and estimated earnings in excess of billings on uncompleted contracts during fiscal year 2000. The increase in accounts receivable is primarily due to the Company's growth in revenues from the prior year. The increase in costs and estimated earnings in excess of billings on uncompleted contracts is due to a ramp-up in production volume to meet increased customer demand and to the current electronics component shortages in the EMS industry, which is lengthening the time necessary to complete assembly jobs. Management believes that the current condition of pervasive shortages of certain electronic components could limit the Company's revenue growth and dampen profitability for at least the first quarter of fiscal 2001. Substantially all of the costs and estimated earnings in excess of billings on uncompleted contracts at June 30, 2000, is expected to be billed and collected within 180 days of that date. At June 30, 2000, the Company had a credit facility for its domestic operating units which consists of an $8 million working capital line secured by accounts receivable, inventory and equipment. Borrowings under the credit agreement bear an interest rate at the bank's prime rate (9.50% at June 30, 2000). At June 30, 2000, borrowings outstanding under this credit facility amounted to $4,617,000. The line of credit agreement contains certain financial covenants which the Company was in compliance at June 30, 2000 or which were waived by the bank. This credit facility expires on July 6, 2001. Subsequent to June 30, 2000, the bank and the Company agreed to lower the borrowing limit from $8 million to $7 million because the Company does not expect to utilize the line for an amount in excess of $7 million. After giving effect to this reduction in the borrowing limit to $7 million, the Company's available borrowing capacity as of June 30, 2000 was $2.2 million. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operating company. This agreement consists of an accounts receivable revolver, with maximum borrowings equal to the lesser of 70% of eligible receivables or 2,250,000 pounds sterling (approximately $3,400,000 at June 30, 2000), and bears interest at the bank's base rate (6.00% at June 30, 2000) plus 2.00%. At June 30, 2000, borrowings outstanding under this credit facility amounted to approximately $2,966,000 and the amount available to borrow based on the advance rate against receivables was approximately $400,000. The credit facility agreement with Ulster Bank Markets expires on October 31, 2000. Management expects the facility to be renewed for another year in the ordinary course of business. The Company's operating units require continuing investment in plant and equipment to remain competitive as technology evolves and to increase production capacity to accommodate business growth and expansion. Capital expenditures during fiscal years 2000, 1999 and 1998 were approximately $3,351,000, $3,426,000 and $1,424,000, respectively. The Company anticipates that additional expenditures of as much as $3 million may be made in fiscal 2001, primarily to expand production capacity at its Thousand Oaks and San Diego plants. A substantial portion of these capital expenditures is expected to be financed by equipment leases and/or installment loans. As more fully described in Note 7 to the accompanying consolidated financial statements, on July 30, 1999 the Company repaid $761,000 of income tax refunds to the IRS plus accrued interest of $272,000. In addition, as further described in Note 7, the Company expects to repay to the IRS additional income tax refunds of up to $1,387,000 plus accrued interest. These repayments were fully accrued in fiscal 1999. On November 12, 1999, the Company sold Irlandus for approximately $4.5 million, as more fully described in Note 2 to the accompanying consolidated financial statements. After giving consideration to disposal costs and to the cash which stayed with the divested operation, the net cash proceeds of this transaction amounted to approximately $2.7 million. Management believes that the Company's cash resources and borrowing capacity on its working capital lines of credit are sufficient to fund operations for at least the next 12 months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents, accounts receivable, and short-term and long-term debt. At June 30, 2000, the carrying amount of long-term debt (including current portion thereof) was $7,103,000 and the fair value was $6,629,000. The carrying values of the Company's other financial instruments approximated their fair values. The fair value of the Company's financial instruments is estimated based on quoted market prices for the same or similar issues. See Note 6 to the accompanying consolidated financial statements for maturities of long-term debt for the next five years. A change in interest rates of one percent would result in an annual impact on interest expense of approximately $90,000. It is the policy of the Company not to enter into derivative financial instruments for speculative purposes. The Company, from time to time, may enter into foreign currency forward exchange contracts in an effort to protect itself from adverse currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. These commitments are generally for terms of less than one year. The foreign currency forward exchange contracts are executed with banks believed to be creditworthy and are denominated in currencies of major industrial countries. Any gain or loss incurred on foreign currency forward exchange contracts is offset by the effects of currency movements on the respective underlying hedged transactions. The Company did not have any open foreign currency forward exchange contracts at June 30, 2000. A portion of the Company's operations consists of an investment in a foreign operating unit. As a result, the Company's financial results have been and may continue to be affected by changes in foreign currency exchange rates. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders SMTEK International, Inc.: We have audited the accompanying consolidated balance sheets of SMTEK International, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders' equity for each of the years in the three-year period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SMTEK International, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Los Angeles, California August 15, 2000 SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) June 30, ---------------------- 2000 1999 --------- --------- Assets Current assets: Cash and cash equivalents $ 532 $ 4,997 Accounts receivable, less allowance for doubtful accounts of $151 and $156 13,365 10,606 Costs and estimated earnings in excess of billings on uncompleted contracts 10,257 6,238 Inventories, net 6,095 5,812 Prepaid expenses 180 201 -------- -------- Total current assets 30,429 27,854 -------- -------- Property, equipment and improvements, at cost: Buildings and improvements 2,758 6,507 Plant equipment 12,875 18,542 Office and other equipment 2,307 2,510 -------- -------- 17,940 27,559 Less: Accumulated depreciation and amortization (11,249) (18,661) -------- -------- Property, equipment and improvements, net 6,691 8,898 -------- -------- Other assets: Goodwill, net 1,126 2,430 Deposits and other assets 282 317 -------- -------- 1,408 2,747 -------- -------- $ 38,528 $ 39,499 ======== ======== SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) (Continued) June 30, ---------------------- 2000 1999 --------- --------- Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 7,583 $ 3,933 Current portion of long-term debt 2,106 2,042 Accounts payable 9,240 11,654 Accrued payroll and employee benefits 1,150 1,296 Interest payable 761 821 Income taxes payable 1,419 1,963 Other accrued liabilities 1,797 1,333 -------- -------- Total current liabilities 24,056 23,042 -------- -------- Long-term debt 4,997 7,153 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common Stock, $.01 par value; 3,750,000 shares authorized; 2,272,012 and 2,267,455 shares issued and outstanding in 2000 and 1999, respectively 23 23 Additional paid-in capital 36,972 36,948 Accumulated deficit (27,430) (26,789) Accumulated other comprehensive loss (90) (878) -------- -------- Total stockholders' equity 9,475 9,304 -------- -------- $ 38,528 $ 39,499 ======== ======== See accompanying notes to consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands except per share amounts) Year ended June 30, ------------------------------ 2000 1999 1998 -------- -------- -------- Revenues $70,252 $51,175 $44,690 Cost of goods sold 62,345 44,605 37,392 ------- ------- ------- Gross profit 7,907 6,570 7,298 ------- ------- ------- Operating expenses: Administrative and selling expenses 5,783 5,375 4,564 Goodwill amortization 1,304 1,284 1,268 Acquisition expenses (Note 3) - - 609 ------- ------- ------- Total operating expenses 7,087 6,659 6,441 ------- ------- ------- Operating income (loss) 820 (89) 857 ------- ------- ------- Non-operating income (expense): Interest income 166 96 47 Interest expense (Note 7) (1,057) (1,700) (1,113) Other income (expense), net (63) 61 (76) ------- ------- ------- Total non-operating expense (954) (1,543) (1,142) ------- ------- ------- Loss from continuing operations before income taxes (134) (1,632) (285) Income tax provision (Note 7) (100) (1,202) - ------- ------- ------- Loss from continuing operations (234) (2,834) (285) Income from discontinued operations, net of tax (Note 2) 254 339 778 Loss on sale of discontinued operations, net of tax (Note 2) (661) - - ------- ------- ------- Net income (loss) (641) (2,495) 493 ------- ------- ------- Other comprehensive income (loss): Foreign currency translation adjustments 32 (228) 41 Reclassification of foreign currency translation adjustments included in loss on sale of discontinued operations (Note 2) 756 - - ------- ------- ------- Total other comprehensive income (loss) 788 (228) 41 ------- ------- ------- Comprehensive income (loss) $ 147 $(2,723) $ 534 ======= ======= ======= Basic and diluted earnings (loss) per share (Note 9): Loss from continuing operations $ (0.10) $ (1.60) $ (0.20) Income from discontinued operations 0.11 0.19 0.54 Loss on sale of discontinued operations (0.29) - - ------- ------- ------- Net income (loss) $ (0.28) $ (1.41) $ 0.34 ======= ======= ======= Shares used in computing basic and diluted earnings (loss) per share 2,270 1,771 1,451 ======= ======= ======= See accompanying notes to consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Year ended June 30, ------------------------------ 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ (641) $(2,495) $ 493 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,340 3,418 2,992 Loss on sale of discontinued operations 661 - - Increase in accounts receivable (5,104) (412) (333) Increase in costs and estimated earnings in excess of billings on uncompleted contracts (4,019) (1,453) (1,596) (Increase) decrease in inventories (1,056) (3,088) 846 (Increase) decrease in accounts payable (927) 3,977 (1,234) Increase in other accrued liabilities 6 1,331 103 Other, net 55 (127) (149) ------- ------- ------- Net cash provided by (used in) operating activities (7,685) 1,151 1,122 ------- ------- ------- Cash flows from investing activities: Capital expenditures (2,241) (1,633) (785) Net proceeds from sale of discontinued operations 2,689 - - Proceeds from sale of assets 155 158 16 Acquisition of subsidiary, net of cash acquired - (113) - ------- ------- ------- Net cash provided by (used in) investing activities 603 (1,588) (769) ------- ------- ------- Cash flows from financing activities: Proceeds from (repayments of) bank lines of credit 3,806 (481) 3,074 Proceeds from long-term debt - - 2,000 Payments of long-term debt (1,498) (2,905) (6,232) Proceeds from issuance of Common Stock, net - 4,463 138 Proceeds from foreign government grants 247 - 123 S Corporation dividends paid - - (529) ------- ------- ------- Net cash provided by (used in) financing activities 2,555 1,077 (1,426) ------- ------- ------- Effect of exchange rate changes on cash 62 (56) 88 ------- ------- ------- Increase (decrease) in cash and cash equivalents (4,465) 584 (985) Cash and cash equivalents at beginning of year 4,997 4,413 5,398 ------- ------- ------- Cash and cash equivalents at end of year $ 532 $ 4,997 $ 4,413 ======= ======= ======= Supplemental cash flow information: Interest paid $ 1,076 $ 1,025 $ 1,218 Income taxes paid 823 25 - Non-cash investing activities: Capital expenditures financed by lease obligations and notes payable 1,110 1,793 639 Conversion of debt to equity - - 2,100 Notes payable issued as partial consideration for purchase of subsidiary - 44 - Other 89 104 - See accompanying notes to consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended June 30, 2000, 1999 and 1998 (In thousands except share amounts)
Common Stock Accumulated --------------- Additional other Total Par paid-in Accumulated comprehensive stockholders' Shares value capital deficit income (loss) equity --------- ----- ---------- ----------- ------------- ------------- Balance at June 30, 1997 1,447,155 $14 $29,994 $(23,678) $(691) $ 5,639 Comprehensive income - - - 493 41 534 Conversion of debt of pooled company 232,188 3 2,052 - - 2,055 Stock issued as brokerage fee 10,000 - 138 - - 138 Exercise of stock options and warrants 15,063 - 183 - - 183 Elimination of duplicate period of pooled company to conform year ends - - - (464) - (464) S Corporation dividends and other equity transactions of pooled company - - 116 (645) - (529) --------- --- ------- -------- ----- ------- Balance at June 30, 1998 1,704,406 17 32,483 (24,294) (650) 7,556 Comprehensive loss - - - (2,495) (228) (2,723) Sale of Common Stock 562,500 6 4,457 - - 4,463 Other 549 - 8 - - 8 --------- --- ------- -------- ----- ------- Balance at June 30, 1999 2,267,455 23 36,948 (26,789) (878) 9,304 Comprehensive income - - - (641) 788 147 Other 4,557 - 24 - - 24 --------- --- ------- -------- ----- ------- Balance at June 30, 2000 2,272,012 $23 $36,972 $(27,430) $ (90) $ 9,475 ========= === ======= ======== ===== ======= See accompanying notes to consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business SMTEK International, Inc. (the "Company") is an electronics manufacturing services ("EMS") provider to original equipment manufacturers ("OEMs") primarily in the computer, telecommunications, instrumentation, medical, financial services automation, industrial and aerospace industries. The Company provides integrated solutions to OEMs across the entire product life cycle, from design to manufacturing to end-of-life services, for the worldwide low-to-medium volume, high complexity segment of the EMS industry. The Company's operating units are located in Thousand Oaks, California; San Diego, California; Fort Lauderdale, Florida; and Craigavon, Northern Ireland. On November 12, 1999, the Company sold its printed circuit board ("PCB") operation, Irlandus Circuits Ltd. ("Irlandus"). The results of operations of Irlandus, which represented a separate segment of the Company's business, are shown as a discontinued operation for all periods presented in the accompanying consolidated financial statements. See Note 2 for additional details of this transaction. As more fully described in Note 3, the Company's acquisition of Technetics, Inc. on January 29, 1999 was accounted for under the purchase method of accounting, and the results of operations of this business have been included in the consolidated financial statements since the date of acquisition. Certain reclassifications have been made to the fiscal year 1999 and 1998 financial statements to conform with the fiscal year 2000 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity. Accounting Period The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 2000, 1999 and 1998, fell on June 30, July 2 and July 3, respectively. In these consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation, except where the context dictates a more specific reference to the actual year-end date. Fiscal 1998 consisted of 53 weeks compared to 52 weeks for the fiscal years 2000 and 1999. Cash Equivalents For financial reporting purposes, cash equivalents consist primarily of money market instruments and bank certificates of deposit that have original maturities of three months or less. Fair Value of Financial Instruments As of June 30, 2000, the carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of those instruments. At June 30, 2000 and 1999, the carrying amount of long-term debt (including current portion thereof) was $7,103,000 and $9,195,000, respectively, and the fair value was $6,629,000 and $8,879,000, respectively. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. All financial instruments are held for purposes other than trading. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of money market instruments and trade receivables. The Company invests its excess cash in money market instruments and certificates of deposit with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one issuer. Concentrations of credit risk with respect to trade receivables exist because the Company's EMS operations rely heavily on a relatively small number of customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses, to date, have been within management's expectations. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method. Long-Lived Assets Property, equipment and improvements are stated at cost. Depreciation and amortization are computed on the straight-line method. The principal estimated useful lives are: buildings - 20 years; improvements - 10 to 18 years; and plant, office and other equipment - 3 to 7 years. Property, equipment and improvements acquired by the Company's foreign operating unit are recorded net of capital grants received from the Industrial Development Board ("IDB") for Northern Ireland. Goodwill represents the excess of acquisition cost over the fair value of net assets of a purchased business, and is being amortized over 5 to 15 years. The recoverability of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and if future undiscounted cash flows are believed insufficient to recover the remaining carrying value of the asset, the carrying value is written down to fair value in the period the impairment is identified. Revenue and Cost Recognition All of the Company's subsidiaries, except for its Thousand Oaks operating unit, recognize revenues and cost of sales upon shipment of products. The Thousand Oaks facility has historically generated a significant portion of its revenue through long-term contracts with suppliers of electronic components and products. Consequently, this operating unit uses the percentage of completion method to recognize revenues and cost of sales. Percentage of completion is determined on the basis of costs incurred to total estimated costs. Contract costs include direct material and direct labor costs and those indirect costs related to the assembly process, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling and administrative costs are charged to expense as incurred. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated loss is charged to cost of goods sold. Other changes in contract price and estimates of costs and profits at completion are recognized prospectively. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. In estimating future tax consequences, all expected future events other than enactments of changes in tax law or statutorily imposed rates are considered. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce deferred tax assets to their estimated realizable amount. Reverse Stock Split On May 24, 1999, the Company effected a 1-for-20 reverse stock split of the Company's authorized and outstanding shares of Common Stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, the Company's authorized shares of Common Stock was reduced from 75,000,000 to 3,750,000. Par value of Common Stock did not change as a result of the Reverse Stock Split. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings (loss) of the Company. Comprehensive Income (Loss) "Accumulated other comprehensive loss" presented on the accompanying consolidated balance sheets consists of foreign currency translation adjustments. Foreign Currency Translation The financial statements of the Company's foreign operating unit have been translated into U.S. dollars from its functional currency, British pounds sterling, in the accompanying consolidated financial statements. Balance sheet amounts have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is recorded as a component of stockholders' equity. Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and provide pro forma net income and pro forma earnings per share disclosures for stock-based awards as if the fair-value-based method defined in SFAS No. 123 had been applied. In accordance with APB Opinion No. 25 and related interpretations, compensation expense would generally be recorded only if, on the date of grant, the current market price of the underlying stock exceeded the exercise price. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Recent Accounting Pronouncements In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued, which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal year ending June 30, 2001. Management does not anticipate that the adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The objective of SAB No. 101 is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. The Company is required to follow the guidance in SAB No. 101 no later than the fourth quarter of its fiscal year 2001. The SEC has recently indicated that it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, the Company is unable to assess the impact, if any, it may have. However, based on current guidance, the Company believes adoption of SAB No. 101 will not have a material impact on the Company's financial position or results of operations. The Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain Transactions Involving Stock Compensation." Interpretation No. 44 provides criteria for the recognition of compensation expense in certain stock-based compensation arrangements that are accounted for under APB Opinion No. 25, "Accounting for Stock-Based Compensation." Interpretation No. 44 is effective July 1, 2000, with certain provisions that are effective retroactively to December 15, 1998 and January 12, 2000. The Company has adopted Interpretation No. 44 effective July 1, 2000. Management does not believe that Interpretation No. 44 will have a material impact on the Company's financial statements. NOTE 2 - DISCONTINUED OPERATIONS On November 12, 1999, the Company sold Irlandus, its PCB fabrication operation in Northern Ireland. The purchaser was a management buy-out team which included one manager from Irlandus and one manager from the Company's EMS operation in Northern Ireland. The purchase price was negotiated on an arms length basis between the Company and the purchaser. The gross sales proceeds in the aggregate amount of 2,800,000 pounds sterling (approximately $4,523,000) consisted of a cash dividend of 500,000 pounds sterling paid by Irlandus just prior to closing and cash of 2,300,000 pounds sterling paid by the purchaser at closing. After giving consideration to disposal costs and the cash of approximately $1.5 million which stayed with the divested operation, the net cash proceeds of this transaction amounted to approximately $2.7 million. Irlandus was the sole operating unit comprising the Company's PCB segment. Accordingly, operating results for Irlandus have been presented in the accompanying consolidated statements of operations and comprehensive income (loss) as a discontinued operation, and are summarized as follows (in thousands): Year Ended June 30, ------------------------ 2000 1999 1998 ------ ------ ------ Net sales $3,383 $8,908 $9,470 ====== ====== ====== Operating income $ 131 $ 112 $ 688 ====== ====== ====== Income from discontinued operations, net of tax $ 254 $ 339 $ 778 ====== ====== ====== Net assets of Irlandus consisted of the following (in thousands): November 12, 1999 (sale date) June 30, 1999 ----------------- ------------- Current assets $ 4,099 $ 3,712 Property, equipment and improvements 3,447 3,268 Current liabilities (2,081) (1,921) Long-term debt (1,314) (1,247) ------- ------- Net assets $ 4,151 $ 3,812 ======= ======= The loss on sale of Irlandus, shown in the accompanying consolidated statements of operation and comprehensive income (loss) as "Loss on sale of discontinued operations", is comprised as follows (in thousands): Gross sales proceeds $ 4,523 Less disposal costs (277) ------- Net sales proceeds 4,246 Less net assets of Irlandus (4,151) ------- Gain on sale before elimination of foreign currency translation account balance 95 Elimination of Irlandus' foreign currency translation account balance (756) ------- Loss on sale of discontinued operations $ (661) ======= Prior to the sale, Irlandus had an accumulated foreign currency translation loss of $756,000, which was carried as a reduction of consolidated stockholders' equity. In accordance with SFAS No. 52, "Foreign Currency Translation", this amount has been included in the determination of the loss on sale of discontinued operations and in accordance with SFAS No. 130, "Reporting Comprehensive Income", an equal and offsetting amount is reported as other comprehensive income in the accompanying consolidated statements of operations and comprehensive income (loss). NOTE 3 - ACQUISITIONS Technetics, Inc. - Purchase Method On January 29, 1999, the Company acquired 100% of the outstanding stock of Technetics, Inc. ("Technetics"), an EMS provider located in San Diego, California. The purchase price of $319,000 was paid in cash of $275,000 and a note of $44,000 bearing interest at 8.0% due in quarterly installments through July 2002. In addition, acquisition costs of $48,000 were incurred. The acquisition was accounted for using the purchase method of accounting. In accordance with APB Opinion No. 16, the total investment made in Technetics of $367,000 was allocated to the acquired net liabilities at their estimated fair values at the acquisition date, which resulted in the recognition of goodwill of $543,000. The goodwill arising from this transaction is being amortized over 15 years. The operations of this facility have been included in the consolidated financial statements since the date of acquisition. Jolt - Pooling-of-Interests Method On June 30, 1998, the Company issued 450,000 shares of Common Stock in exchange for all of the outstanding shares of Jolt Technology, Inc. ("Jolt"), an EMS provider located in Fort Lauderdale, Florida. This acquisition was accounted for under the pooling-of-interests method of accounting. An adjustment of $464,000 was made to stockholders' equity as of June 30, 1998 to eliminate the effect of including Jolt's results of operations for the six months ended December 31, 1997 in both the fiscal years ended June 30, 1998 and June 30, 1997. Acquisition costs of $609,000 related to the combination with Jolt were expensed upon consummation of the transaction, and are included in the accompanying 1998 Consolidated Statement of Operations. NOTE 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings in excess of billings on uncompleted contracts consists of revenue recognized under electronics assembly contracts, which amounts were not billable at the balance sheet date. Substantially all of the unbilled amount is expected to be billed and collected within 180 days of the balance sheet date. The components of costs and estimated earnings in excess of billings on uncompleted contracts are as follows (in thousands): June 30, --------------------- 2000 1999 --------- -------- Costs incurred to date on uncompleted contracts $ 56,381 $ 26,376 Estimated earnings based on percentage of completion 6,889 2,663 -------- -------- 63,270 29,039 Less: Billings to date (53,013) (22,801) -------- -------- Total costs and estimated earnings in excess of billings on uncompleted contracts $ 10,257 $ 6,238 ======== ======== NOTE 5 - INVENTORIES Inventories consist of the following (in thousands): June 30, ------------------ 2000 1999 ------ ------ Raw materials $3,894 $4,306 Work in process 2,129 1,372 Finished goods 72 134 ------ ------ Total inventories $6,095 $5,812 ====== ====== In the fourth quarter of fiscal 1999, the Company recorded a provision of $487,000 for excess inventory. NOTE 6 - FINANCING ARRANGEMENTS Bank Credit Agreements At June 30, 2000, the Company had a credit facility for its domestic operating units which consists of an $8 million working capital line secured by accounts receivable, inventory and equipment. Borrowings under the credit agreement bear an interest rate at the bank's prime rate (9.50% at June 30, 2000). At June 30, 2000, borrowings outstanding under this credit facility amounted to $4,617,000. The line of credit agreement contains certain financial covenants which the Company was in compliance at June 30, 2000 or which were waived by the bank. This credit facility expires on July 6, 2001. Subsequent to June 30, 2000, the bank and the Company agreed to lower the borrowing limit from $8 million to $7 million because the Company does not expect to utilize the line for an amount in excess of $7 million. After giving effect to this reduction in the borrowing limit to $7 million, the Company's available borrowing capacity as of June 30, 2000 was $2.2 million. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operating company. This agreement consists of an accounts receivable revolver, with maximum borrowings equal to the lesser of 70% of eligible receivables or 2,250,000 pounds sterling (approximately $3,400,000 at June 30, 2000), and bears interest at the bank's base rate (6.00% at June 30, 2000) plus 2.00%. At June 30, 2000, borrowings outstanding under this credit facility amounted to approximately $2,966,000 and the amount available to borrow based on the advance rate against receivables was approximately $400,000. The credit facility agreement with Ulster Bank Markets expires October 31, 2000, prior to which management expects the facility to be renewed in the ordinary course of business. Long-Term Debt Long-term debt consists of the following (in thousands): June 30, ------------------- 2000 1999 ------- ------- Mortgage note secured by real property at the Northern Ireland operations, with interest at variable rates (7.38% and 6.63% at June 30, 2000 and 1999, respectively), payable in semiannual installments through 2009 $ 747 $ 1,093 Notes payable secured by equipment, interest at 8.49% to 10.9%, payable in monthly installments through June 2011 804 1,137 Capitalized lease obligations (Note 10) 2,081 3,406 8-1/2% Convertible Subordinated Debentures, due 2008, interest payable semi-annually and convertible at holders' option at a price of $212.50 per share at any time prior to maturity 1,580 1,580 7% Convertible Subordinated Debentures, due May 15, 2001, interest payable semi-annually and convertible at holders' option at a conversion price of $40.00 per share at any time prior to maturity 353 375 Obligations to former officers, employees and directors under consulting and deferred fee agreements 951 904 Other 587 700 ------- ------- 7,103 9,195 Less current maturities 2,106 2,042 ------- ------- Total long-term debt $ 4,997 $ 7,153 ======= ======= The aggregate amounts of minimum maturities of other long-term debt for the indicated fiscal years (other than capitalized lease obligations, as described in Note 10) are as follows (in thousands): 2001 $1,399 2002 380 2003 296 2004 214 2005 203 Thereafter 2,530 ------ $5,022 ====== In March 1996, the Company entered into a settlement agreement with certain of its former officers, key employees and directors (the "Participants") to restructure its outstanding obligations under several consulting programs and deferred fee arrangements which had provided for payments to the Participants after their retirement from the Company or from its Board of Directors. Under terms of the settlement, the Participants agreed to relinquish all future payments due them under these consulting programs and deferred fee arrangements in return for an aggregate of 29,793 Common Stock purchase warrants, Series G. The Company is obligated to pay the Participants $50.00 for each warrant which remained unexercised on the June 1, 1998 warrant expiration date, payable in semiannual installments over two to ten years. The Company has recorded a liability for the present value of these future payments, which amounted to $951,000 and $904,000 at June 30, 2000 and 1999, respectively. NOTE 7 - INCOME TAXES In connection with the filing of its federal income tax return for fiscal year 1995, and acting on advice of its tax advisor, the Company filed for a refund to carry back losses described in Section 172(f) of the Internal Revenue Code of 1986, as amended (the "IRC"). Section 172(f) of the IRC provides for a ten year net operating loss ("NOL") carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. As a result of these refund filings, in September and October 1995 the Company received federal income tax refunds totaling $1,871,000, net of costs associated with applying for such refunds, and recognized an income tax benefit of $1,110,000 in the quarter ended December 31, 1995. The balance of the net refunds received, $761,000, was recorded as income taxes payable, pending resolution by the Internal Revenue Service ("IRS") of the appropriateness and the amount of the 172(f) carryback. Beginning in May 1997, the Company came under IRS audit with respect to such refund claims. In September 1998, the Company received tax deficiency notices from the IRS in which the IRS advised the Company that it was disallowing substantially all of the tax refunds received by the Company in 1995 which had been recorded as an income tax benefit. In January 1999, the Company and its tax advisor filed a protest letter with the IRS to appeal the disallowance. Subsequent to filing the protest letter, the U.S. Tax Court upheld the disallowance of refund claims made by another taxpayer involving Section 172(f) issues similar to those on which the Company had based certain of its refund claims. The Company can give no assurance that it will prevail in its appeal, and in light of the Tax Court ruling, the Company determined that it was appropriate to establish a full reserve for the contested tax refund amounts and interest thereon. Accordingly, in the fourth quarter of fiscal 1999 the Company recorded income tax expense, net of fee amounts refunded to the Company from its tax advisor, of $1,110,000 plus accrued interest expense of $725,000. In connection with the IRS audit, and the subsequent internal review by the Company, the Company determined that the net refund of $761,000 which had been received in 1995, and which was recorded as income taxes payable upon receipt, needed to be returned to the IRS. Accordingly, on July 30, 1999, the Company repaid this amount to the IRS plus accrued interest of $272,000. After giving effect to the July 1999 repayment, the Company's remaining recorded federal tax liability is $1,387,000, and accrued interest thereon is approximately $638,000. The Company expects the pending appeal of the disallowed refund claims to be resolved with the IRS by the end of calendar year 2000. Income tax expense, all current, consists of the following (in thousands): Year ended June 30, ------------------------ 2000 1999 1998 ---- ------ ---- Federal $ 38 $1,110 $ - State 62 92 - ---- ------ ---- $100 $1,202 $ - ==== ====== ==== Temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following (in thousands): June 30, -------------------- 2000 1999 -------- -------- Deferred tax assets: Accrued employee benefits $ 471 $ 512 Reserves and allowances 685 622 Domestic NOL carryforwards 11,983 14,171 Foreign NOL carryforwards 1,017 3,422 Alternative minimum tax credits 104 - Other 29 47 ------- ------- Total deferred tax assets 14,289 18,774 Deferred tax liabilities: Depreciation (100) (132) ------- ------- Net deferred tax assets before allowance 14,189 18,642 Less valuation allowance (14,189) (18,642) ------- ------- Net deferred tax assets after allowance $ - $ - ======= ======= In assessing the realizability of net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future domestic and foreign taxable income of approximately $33,000,000 and $3,000,000, respectively, prior to the expiration of the NOL carryforwards. Based on the level of historical losses, management believes that it does not have the basis to conclude that it is more likely than not that the deferred tax assets will be realized, and therefore, has recorded a 100% valuation allowance to offset the net deferred tax assets. The valuation allowance was $14,189,000 and $18,642,000 as of June 30, 2000 and 1999, respectively. The net change in the total valuation allowance for the years ended June 30, 2000 and 1999 was an increase (decrease) of ($4,453,000) and $4,000, respectively. The provision for income taxes for continuing operations differs from an amount computed using the statutory federal income tax rate as follows (in thousands): Year ended June 30, ----------------------------- 2000 1999 1998 ------- ------- ------- Federal tax benefit computed at statutory rate $ (46) $ (555) $ (97) State income tax, net of federal benefit 59 61 - Amortization of goodwill 443 437 431 Non-deductible acquisition expenses - - 159 Expiration of unutilized NOL carryforwards 472 - - Net change in valuation allowance (835) 119 (74) Reversal of fiscal 1996 income tax benefit - 1,110 - Untaxed S Corporation earnings - - (377) Other 7 30 (42) ------ ------ ------ Income tax expense from continuing operations $ 100 $1,202 $ - ====== ====== ====== The provision for income tax related to discontinued operations is as follows (in thousands): Year ended June 30, -------------------- 2000 1999 1998 ---- ---- ---- Provision for income taxes related to discontinued operations 72 - - The provision for income tax related to discontinued operations includes a reduction in the valuation allowance of $3,618,000, $115,000 and $265,000 for the years ended June 30, 2000, 1999 and 1998 respectively. As of June 30, 2000, the Company has U.S. federal NOL carryforwards of approximately $33,000,000, expiring in 2005 through 2018, and state NOL carryforwards of $18,200,000, expiring in 2001 through 2012. The NOL carryforward for federal alternative minimum tax purposes is approximately $18,700,000. The Company's ability to use its NOL carryforwards to offset future taxable income may be subject to annual limitations due to certain substantial stock ownership changes which have occurred in the current and prior years. The Company maintains an ongoing analysis to determine if the future utilization of the NOLs will be limited due to these ownership changes. Pretax income (loss) from foreign continuing operations for fiscal 2000, 1999 and 1998 was ($627,000), $45,000 and $702,000, respectively. Income of the Company's Northern Ireland subsidiary is sheltered by operating loss carryforwards for United Kingdom income tax purposes (the "U.K. NOL"). The current income tax benefit from the U.K. NOL was $0, $0 and $122,000 in fiscal 2000, 1999, and 1998, respectively, and has been treated as a reduction in the provision for income taxes. At June 30, 2000, the U.K. NOL amounted to approximately $3,000,000. Substantially all of these NOLs from prior years of the Company's Northern Ireland subsidiary can be carried forward for an indefinite period of time to reduce future taxable income. Effective June 30, 1998, the Company acquired Jolt, which was an S Corporation for income tax purposes prior to its acquisition by the Company. Following are pro forma consolidated operating results, which present state income taxes (the Company's federal NOLs are assumed to be utilized to shelter Jolt's federal taxable income) as a pro forma adjustment as if Jolt had filed C Corporation tax returns for the pre-acquisition periods (in thousands): Year ended June 30, 1998 ------------- Loss from continuing operations before pro forma adjustments per consolidated statements of operations $(285) Pro forma provision for income taxes 61 ----- Pro forma net loss from continuing operations $(346) ===== NOTE 8 - STOCKHOLDERS' EQUITY Sales of Common Stock In May 1999, the Company sold 562,500 shares of Common Stock to Thomas M. Wheeler, the Company's largest shareholder, for an aggregate price $4,500,000. Costs of this issuance were $37,000. Common Stock Issued as Brokerage Fee In June 1998, 10,000 shares of Common Stock were issued as a brokerage fee in conjunction with the closing of the acquisition of Jolt. The ascribed value of the 10,000 shares of $138,000 is included in acquisition expenses in the consolidated statement of operations and comprehensive income (loss) for the year ended June 30, 1998. Stock Option Plans The Company has in effect several stock-based plans under which non- qualified and incentive stock options and restricted stock awards have been granted to employees and directors. Subject to the discretion of the Board of Directors (the "Board"), employee stock options generally become exercisable over a period of two to three years as determined by the Board, and generally have a 10-year exercise term when granted. The exercise price of all incentive stock options must be equal to or greater than the market value of the shares on the date of grant. The exercise price of non-statutory stock options must be at least 85% of the market value of the Common Stock on the date of grant. Under the Company's Amended and Restated 1998 Non-Employee Directors Stock Plan, each eligible director receives shares of Company securities valued at $1,000 for attendance at each Board meeting and $500 for attendance at each Board committee meeting. Additionally, annually beginning in fiscal 2000 each non-employee director receives Company securities with a fair market value of $12,000. In fiscal 2000 and 1999, options to purchase a total of 14,855 and 8,872 shares, respectively, were granted to the Company's non-employee directors at exercise prices ranging from $3.63 to $3.88 in 2000 and $6.50 to $10.00 in 1999. Annually, each non-employee director makes an election to receive director compensation in the form of Common Stock or stock options. The fair value of Common Stock is equal to the market value of Common Stock on the grant date. The fair value of stock options is determined using the Black-Scholes option pricing model (as discussed in more detail below) using data and assumptions as of the grant date. The exercise price of all stock options is equal to the market value at the date of grant. In fiscal 2000 and 1999, the Company recorded expense of $18,000 and $8,000, respectively, related to the issuance of Common Stock for director compensation. Activity under the employee and non-employee director stock option plans for fiscal years 2000, 1999 and 1998 was as follows: Weighted average exercise Shares price per share --------- ------------------------- Shares under option, June 30, 1997 109,850 $23.20 Granted 30,560 17.00 Expired or canceled (9,293) 20.80 Exercised (13,723) 10.00 -------- Shares under option, June 30, 1998 117,394 $23.40 Granted 130,766 9.40 Expired or canceled (114,969) 23.02 -------- Shares under option, June 30, 1999 133,191 $ 9.89 Granted 209,205 3.79 Expired or canceled (38,040) 9.00 -------- Shares under option, June 30, 2000 304,356 $ 5.81 ======== ====== The following table summarizes information about shares under option at June 30, 2000: Outstanding Exercisable --------------------------------- --------------------- Expiration Weighted Weighted Range of date average average exercise Options (fiscal exercise Options exercise prices outstanding year end) price exercisable price - -------------- ----------- ---------- -------- ----------- -------- $ 3.38 - 5.75 202,855 2010 $ 3.75 14,854 $ 3.86 6.25 - 16.25 98,501 2009 9.57 60,015 9.65 21.25 3,000 2008 21.25 3,000 21.25 ------- ------ Total 304,356 $ 5.81 77,869 $ 8.99 ======= ====== At June 30, 2000, under the employee and non-employee director stock option plans there were 104,772 and 25,352 shares, respectively, available for future grants. Stock Based Compensation The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its employee stock option plans and awards of options to non-employee directors. Had compensation expense for stock-based awards been determined consistent with SFAS No. 123, the Company's results of operations would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts): Year ended June 30, --------------------------------- 2000 1999 1998 -------- -------- --------- Net income (loss): As reported $ (641) $(2,495) $ 493 Pro forma $ (836) $(3,047) $ (28) Earnings (loss) per share: As reported $(0.28) $ (1.41) $ 0.34 Pro forma $(0.37) $ (1.72) $(0.02) For purposes of this pro forma disclosure, the "fair value" of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000, 1999 and 1998: dividend yield of 0.0% for all years; expected volatility of 75%, 55% and 65% for 2000, 1999 and 1998, respectively; risk-free interest rates ranging from 5.9% to 6.7% for 2000, 4.1% to 5.7% for 1999, and 5.4% to 6.3% for 1998; and expected lives of five years for all years. The weighted average fair value of options granted during the years ended June 30, 2000, 1999 and 1998 was $2.53, $4.99 and $10.13, respectively. Warrants In connection with the issuance of certain debt in fiscal 1996, 1,500,000 Series E warrants were issued to an investment banking firm which served as the placement agent for this debt. The exchange ratio of warrants to Common Stock shares is 20-to-1. The Series E warrants are exercisable until their expiration on February 28, 2001, and provided for an original exercise price of $50.00 per share, subject to adjustment in the event the Company issues new Common Stock at an effective price less than the effective exercise price on the Series E warrants. The effective exercise price on the Series E warrants was $30.20 per share as of June 30, 2000. The warrants had no intrinsic value on the date of grant. On June 30, 2000, 22,750 Series C warrants, 2,500 Series D warrants and 15,000 Series H warrants expired unexercised. NOTE 9 - OTHER FINANCIAL INFORMATION Earnings (Loss) Per Share During the years ended June 30, 2000, 1999 and 1998, options and warrants to purchase 419,606, 248,441 and 232,644 shares of Common Stock, respectively, at prices ranging from $3.38 to $70.00 for fiscal 2000, $6.50 to $70.00 for fiscal 1999, and $15.00 to $70.00 for fiscal 1998 were outstanding, but were not included in the computation of diluted earnings per share because the Company had a loss from continuing operations and as such, the options would be antidilutive. Convertible subordinated debentures aggregating $1,580,000, due in 2008 and convertible at a price of $212.60 per share at any time prior to maturity, were outstanding during fiscal years 2000, 1999 and 1998, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Convertible subordinated debentures aggregating $323,000, due on May 15, 2001 and convertible at a price of $40.00 per share at any time prior to maturity, were outstanding during fiscal years 2000, 1999 and 1998, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Valuation and Qualifying Accounts and Reserves Following is the Company's schedule of valuation and qualifying accounts and reserves for fiscal years 2000, 1999 and 1998 (in thousands): Allowance for Doubtful Accounts: - -------------------------------- June 30, -------------------- 2000 1999 1998 ---- ---- ---- Balance at beginning of period $156 $167 $163 Beginning balance of acquired company - 13 - Charged to costs and expenses 104 71 57 Deductions (82) (95) (53) Sale of subsidiary (27) - - ---- ---- ---- Balance at end of period $151 $156 $167 ==== ==== ==== NOTE 10 - COMMITMENTS AND CONTINGENCIES Lease Commitments Future minimum lease payments at June 30, 2000 were as follows (in thousands): Capital Operating leases leases ------- --------- Fiscal 2001 $ 813 $ 580 Fiscal 2002 679 518 Fiscal 2003 451 474 Fiscal 2004 342 122 Fiscal 2005 54 69 ------ ------ Total 2,339 $1,763 ====== Less: Interest expense (258) ------ Present value of minimum lease payments $2,081 ====== The capitalized cost of the related assets (primarily plant equipment), which are pledged as security under the capital leases, was $3,798,000 and $5,390,000 at June 30, 2000 and 1999, respectively. Accumulated amortization on assets under capital leases amounted to $1,482,000 and $1,803,000 at June 30, 2000 and 1999, respectively. Rental expense for operating leases amounted to $756,000, $680,000, and $524,000 for fiscal 2000, 1999 and 1998, respectively. Government Grants Pursuant to government grant agreements with the IDB for Northern Ireland, the Company's Northern Ireland operating unit has been reimbursed for a portion of qualifying capital expenditures and for certain employment and interest costs. Approximately $228,000 of the government grants received by this operating unit are subject to repayment in the event that it ceases business, permanently discontinues production, or fails to pay to the IDB any amounts due under its mortgage note payable (Note 6). Management does not expect that the Company will be required to repay any grants under these provisions. Foreign Currency Exposure The Company's investment in its Northern Ireland operating unit is represented by operating assets and liabilities denominated in its functional currency of British pounds sterling. In addition, in the normal course of business this operating unit enters into transactions denominated in European currencies other than British pounds sterling. As a result, the Company is subject to transaction and translation exposure from fluctuations in foreign currency exchange rates. The Company uses a variety of strategies, including foreign currency forward contracts and internal hedging in an effort to minimize or eliminate foreign currency exchange rate risk associated with substantially all of its foreign currency transactions. Gains and losses on these hedging transactions, which were immaterial for 2000, 1999 and 1998, are generally recorded in earnings in the same period as they are realized, which is usually in the same period as the underlying or originating transactions. The Company does not enter into speculative foreign currency transactions. At June 30, 2000 and 1999, the Company did not have any open foreign currency forward contracts. Environmental Matters The Company is currently involved in certain remediation and investigative studies regarding soil and groundwater contamination at the site of a former printed circuit board manufacturing plant in Anaheim, California which was leased by one of the Company's former subsidiaries, Aeroscientific Corp. Under the terms of a cost sharing agreement entered into several years ago, the remaining costs to be incurred to remediate this site will be borne on a 50-50 basis between the Company and the property owner. At June 30, 2000, the Company had a reserve of $447,000 for future remediation costs. Management, based in part on consultations with outside environmental engineers and scientists, believes that this reserve is adequate to cover its share of future remediation costs at this site. It is possible, however, that these future remediation costs could differ significantly from the estimates, and that the Company's portion could exceed the amount of its reserve. The Company's liability for remediation in excess of its reserve could have a material adverse impact on its business, financial condition and results of operations. NOTE 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION As more fully described in Note 2, the Company sold its Northern Ireland operation, which represented a separate segment of the Company's business, and which is shown as a discontinued operation in the consolidated statement of operations and comprehensive income (loss). As such, the Company now operates in a single business segment--the EMS industry. The Company's revenues and long-lived assets, net of accumulated depreciation, by geographic area are as follows (in thousands): Year ended June 30, --------------------------------- 2000 1999 1998 ------- ------- ------- Revenues: United States $50,107 $34,247 $23,029 Northern Ireland 20,145 16,928 21,661 ------- ------- ------- Total $70,252 $51,175 $44,690 ======= ======= ======= Long-lived assets: United States $ 5,621 $ 5,898 Northern Ireland 2,196 5,430 ------- ------- Total $ 7,817 $11,328 ======= ======= The Company had sales to three customers which accounted for 15.5%, 13.5% and 10.2% of revenues in fiscal 2000, sales to three customers which accounted for 23.8%, 11.4% and 7.5% of revenues in fiscal 1999, and sales to three customers which accounted for 23.7%, 16.4% and 16.4% of revenues in fiscal 1998. NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following is a summary of the quarterly results of operations (in thousands except per share amounts): Quarters ended ----------------------------------------------------- Sep 30 Dec 31 Mar 31 Jun 30 Total -------- -------- -------- -------- ------- Fiscal 2000 - ----------- Revenues $15,211 $14,441 $19,213 $21,387 $70,252 Income (loss) from continuing operations $ (78) $ (82)(A) $ (235) $ 161 $ (234) Net income (loss) $ 135 $ (702)(A) $ (235) $ 161 $ (641) Basic earnings (loss) per share $ 0.06 $ (0.31) $ (0.10) $ 0.07 $ (0.28) Fiscal 1999 - ----------- Revenues $12,121 $13,756 $12,219 $13,079 $51,175 Income (loss) from continuing operations $ 114 $ 117 $ (26) $(3,039)(B) $(2,834) Net income (loss) $ 232 $ 207 $ 80 $(3,014)(B) $(2,495) Basic earnings (loss) per share $ 0.14 $ 0.12 $ 0.05 $ (1.53) $ (1.41) (A) Included in the loss from continuing operations and net loss for the three months ended December 31, 1999 is a $350,000 benefit relating to the favorable resolution of certain operating contingencies. (B) Included in the loss from continuing operations and net loss for the three months ended June 30, 1999 is (i) income tax expense of $1,110,000 to provide for the expected repayment to the IRS of tax refunds that were received in fiscal 1996 which were substantially disallowed in fiscal 1999, and accrued interest thereon of $725,000, as further described in Note 7 herein, and (ii) a provision of $487,000 for excess inventory. NOTE 13 - LITIGATION In October 1999, a lawsuit was filed against the Company by two of its shareholders in the Superior Court of Ventura County, California. The action purports to arise out of the merger of the Company with Jolt in June 1998. The lawsuit asserts claims against the Company and certain of its present and former officers and directors and an income tax advisor for breach of contract, common law fraud, and violation of the California Corporate Securities Act. The lawsuit seeks damages in the amount of $3,500,000. Certain individual director or officer defendants have been dismissed or the court has ordered them to be dismissed. The action is now proceeding in discovery against the Company, the remaining officers and directors, and the income tax advisor. No trial date has been set at this time. The Company denies the allegations asserted in the lawsuit and is engaged in a vigorous defense of the matter. The Company believes that the plaintiffs' claims lack merit. Consequently, no amounts have been accrued in the consolidated financial statements for the potential outcome of this litigation at this time. Although the Company denies the allegations in the matter, there can be no assurance the Company will prevail. An unfavorable result could adversely affect the Company's business, results of operations and/or financial condition. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Market and Dividend Information The Company's common shares are traded on Nasdaq Small Cap Market (ticker symbol "SMTI") and the Pacific Exchange (ticker symbol "SMK"). The Company transferred its Common Stock listing from the New York Stock Exchange to Nasdaq effective July 1, 1999. The high and low closing sales prices for the Common Stock for the last two fiscal years, as reported by Nasdaq (in fiscal 2000) and the NYSE (in fiscal 1999), are set forth in the following table. Fiscal 2000 Fiscal 1999 ------------- --------------- High Low High Low ----- ----- ------ ----- 1st Quarter $7.38 $3.63 $16.25 $7.50 2nd Quarter 5.25 3.06 13.75 8.13 3rd Quarter 4.63 3.63 11.25 6.25 4th Quarter 4.38 3.00 11.56 5.63 There were approximately 1,250 stockholders of record at August 15, 2000. The Company suspended dividend payments in 1989. A resumption of dividend payments is not anticipated in the foreseeable future. Form 10-K Annual Report A copy of the Annual Report on Form 10-K (without exhibits) may be obtained free of charge upon written request to SMTEK International, Inc., 2151 Anchor Court, Thousand Oaks, California 91320 attention: Secretary. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS AND OTHER CORPORATE INFORMATION DIRECTORS EXECUTIVE OFFICERS ========= ================== Clay M. Biddinger Gregory L. Horton Chief Executive Officer President and Chief Executive Officer CMB Capital, LLC Tampa, Florida Richard K. Vitelle Vice President - Finance and James P. Burgess Administration, Chief Financial Officer, Vice President and Treasurer Trilogy Marketing Inc. Naples, Florida George R. Weatherford Vice President - Operations Gregory L. Horton Chairman of the Board, Mitchell J. Freedman President and Chief General Counsel and Secretary Executive Officer SMTEK International, Inc. Bruce E. Kanter Management Consultant Thousand Oaks, California Oscar B. Marx, III OPERATING UNITS President and CEO, =============== TMW Enterprises, Inc. SMTEK Thousand Oaks Troy, Michigan Thousand Oaks, California SMTEK San Diego LEGAL COUNSEL San Diego, California ============= Gibson, Dunn & Crutcher LLP Jolt Technology, Inc. Irvine, California Fort Lauderdale, Florida INDEPENDENT AUDITORS SMTEK Europe, Ltd. ==================== Craigavon, Northern Ireland KPMG LLP United Kingdom Los Angeles, California INVESTOR RELATIONS COUNSEL TRANSFER AGENT & REGISTRAR ========================== ========================== Foley/Freisleben LLC American Stock Transfer & Los Angeles, California Trust Company 40 Wall Street New York, New York 10005
EX-21 4 0004.txt EXHIBIT 21 SMTEK INTERNATIONAL, INC. SUBSIDIARIES OF THE REGISTRANT All subsidiaries are 100% owned by SMTEK International, Inc., except as otherwise indicated, and are included in the consolidated financial statements. Each subsidiary was organized in the jurisdiction specified under its name in the following list. DDL Europe Limited (holding company only) Northern Ireland SMTEK Europe Limited (100%-owned by DDL Europe Limited) Northern Ireland Jolt Techology, Inc. Delaware SMTEK, Inc., dba SMTEK Thousand Oaks California Technetics, Inc., dba SMTEK San Diego California EX-23 5 0005.txt EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors SMTEK International, Inc. We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-02969 and 333-31349) and the Registration Statements on Form S-8 (Nos. 33-74400, 333-08689 and 333-72139) of SMTEK International, Inc. of our report dated August 15, 2000, relating to the consolidated balance sheets of SMTEK International, Inc. and subsidiaries as of June 30, 2000 and 1999 and the related consolidated statements of operations and comprehensive income (loss), cash flows and stockholders' equity for each of the years in the three-year period ended June 30, 2000, which report appears in the SMTEK International, Inc. 2000 Annual Report on Form 10-K. /s/ KPMG LLP Los Angeles, California August 25, 2000 EX-27 6 0006.txt
5 12-MOS JUN-30-2000 JUN-30-2000 532000 0 13516000 151000 6095000 30429000 17940000 11249000 38528000 24056000 0 23 0 0 9452000 38528000 70252000 70252000 62345000 69432000 0 0 1057000 (134000) 100000 (234000) (407000) 0 0 (641000) (0.28) (0.28)
EX-99 7 0007.txt EXHIBIT 99 UNDERTAKING FOR FORM S-8 REGISTRATION STATEMENT With respect to the Registration Statements previously filed by the Company on Form S-8, the Company hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----